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ACCA Paper P3
Business analysis Essential text
British library cataloguinginpublication data
A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 9781847105509 © Kaplan Financial Limited, 2008 Printed and bound in Great Britain. Acknowledgements We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of Management Accountants for permisssion to reproduce past examination questions. The answers have been prepared by Kaplan Publishing. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing.
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Contents Page Chapter 1
The nature of strategic business analysis
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Chapter 2
The environment and competitive forces
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Chapter 3
Marketing and the value of goods and services
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Chapter 4
Internal resources, capabilities and competences
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Chapter 5
Stakeholders, ethics and culture
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Chapter 6
Strategic choice I
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Chapter 7
Strategic choice II
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Chapter 8
Organisational structure
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Chapter 9
Business process change
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Chapter 10
The role of information technology
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Chapter 11
Quality
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Chapter 12
Project management
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Chapter 13
The role of finance in formulating and implementing business strategy
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Chapter 14
Strategy and people
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Chapter 15
Strategic development and managing strategic 353 change
Chapter 16
Questions & Answers
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chapter ACCA Introduction
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ACCA Introduction
How to Use the Materials
These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. The product range contains a number of features to help you in the study process. They include: (1) Detailed study guide and syllabus objectives (2) Description of the examination (3) Study skills and revision guidance (4) Complete text or essential text (5) Question practice The sections on the study guide, the syllabus objectives, the examination and study skills should all be read before you commence your studies. They are designed to familiarise you with the nature and content of the examination and give you tips on how to best to approach your learning. The complete text or essential text comprises the main learning materials and gives guidance as to the importance of topics and where other related resources can be found. Each chapter includes:
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The learning objectives contained in each chapter, which have been carefully mapped to the examining body's own syllabus learning objectives or outcomes. You should use these to check you have a clear understanding of all the topics on which you might be assessed in the examination.
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The chapter diagram provides a visual reference for the content in the chapter, giving an overview of the topics and how they link together.
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The content for each topic area commences with a brief explanation or definition to put the topic into context before covering the topic in detail. You should follow your studying of the content with a review of the illustration/s. These are worked examples which will help you to understand better how to apply the content for the topic. KAPLAN PUBLISHING
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Test your understanding sections provide an opportunity to assess your understanding of the key topics by applying what you have learned to short questions. Answers can be found at the back of each chapter.
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Summary diagrams complete each chapter to show the important links between topics and the overall content of the paper. These diagrams should be used to check that you have covered and understood the core topics before moving on.
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Question practice is provided at the back of each text.
Icon Explanations Definition Key definitions that you will need to learn from the core content. Key Point Identifies topics that are key to success and are often examined. Expandable Text Expandable text provides you with additional information about a topic area and may help you gain a better understanding of the core content. Essential text users can access this additional content online (read it where you need further guidance or skip over when you are happy with the topic) Illustration Worked examples help you understand the core content better. Test Your Understanding Exercises for you to complete to ensure that you have understood the topics just learned. Tricky topic When reviewing these areas care should be taken and all illustrations and test your understanding exercises should be completed to ensure that the topic is understood.
For more details about the syllabus and the format of your exam, please see your Complete Text or go online. Online subscribers Syllabus Paper background Objectives of the syllabus
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ACCA Introduction Core areas of the syllabus Syllabus learning objectives and chapter references The examination Paperbased examination tips Study skills and revision guidance Preparing to study Effective studying Further reading You can find further reading and technical articles under the student section of ACCA's website.
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chapter
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The nature of strategic business analysis Chapter learning objectives Upon completion of this chapter you will be able to:
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describe the common vocabulary of strategic management and why strategic management is important
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describe the different levels of strategic planning for a profit seeking and a notforprofit organisation
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describe the JSW model for both profitseeking and notfor profitseeking organisations
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describe the JS lenses (strategy as design, experience, ideas) explore the scope of business analysis and its relationship to strategic management.
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The nature of strategic business analysis
1 Introduction This chapter introduces some of the main terms used in discussions about strategy. It also looks at the meanings of the word ‘strategy’ and asks to what extent strategic planning is useful. Firstly, however, two brief company histories will be presented to illustrate how companies can be affected by circumstances and decisions.
Expandable text IBM
Expandable text Kodak
Test your understanding 1
Think about what planning issues might currently be facing the newspaper industry.
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2 The common language of strategic planning Strategic planning ‘Strategic planning’ can also be known as ‘longterm planning’ or ‘corporate planning’. Those alternative names give some insight into the nature of strategic planning. It:
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considers the longer term (think of a timehorizon of aboutfive years or beyond)
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considers the whole organisation.
Other characteristics of strategic planning are that:
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it gives direction to the whole organisation, and integrates its activities it considers all stakeholders it looks at how to gain a sustainable competitive advantage it relates the organisation, its resources and competences to its environment.
There is no universally accepted definition of strategy, and the word is used in different contexts to mean different things. The following definition is as useful as any.
‘Strategy is a pattern of activities that seeks to achieve the objectives of the organisation and adapt its scope, resources and operations to environmental changes in the long term.’
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Why bother? Studies show that companies that plan are more successful than those that do not. Strategic planning can have the following potential advantages:
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forces organisations to look ahead. ‘Forewarned is forearmed’ improves the organisation’s fit with its environment makes best use of scarce resources influences the future (advertising, lobbying) provides direction for the business monitors progress (control) ensures consistent goal and objectives.
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The nature of strategic business analysis But, there are potential disadvantages:
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cost = time and money – ‘Paralysis by analysis’
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less relevance in a crisis.
bureaucracy develops plan = straightjacket and opportunities are ignored because they are not in the plan
Strategic planning is particularly important when:
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there are long lead times the business needs to be turned around there is high capital expenditure many stakeholders are affected.
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Test your understanding 2
How important is strategic planning likely to be to the following organisations? (a) A health service. (b) A small building contractor.
The rational ‘top down’ approach to strategic planning This is the approach that will be of most relevance in the exam. It breaks down the process into three distinct steps:
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strategic analysis (examination of the current strategic position) strategic choice strategic implementation (or strategy into action).
This can be represented in the diagram on the following page. Broadly, information about the organisation and its environment is collected and rational decisions are made about future courses of action.
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Mission – the purpose of the organisation (e.g. maximise shareholder wealth through operating a supermarket or treating patients in a hospital).
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Objectives – quantified, timelimited targets. Stakeholder – any person or thing affected by the organisation: shareholders, employees, customers, suppliers, local community, etc.
This approach will be examined in more detail in section 4.
Emergent strategies The research of Mintzberg (1987) suggests that few of the strategies followed by organisations in the real world are as consciously planned as the approaches above suggest. He believes this to be an unrealistic view of strategic planning, believing instead that strategies evolve over time (emerge) rather than result from an indepth analysis of every aspect of the environment and an impartial evaluation of every possible alternative.
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Incrementalism Lindblom did not believe in the rational model to decision making as he suggested that in the real world it was not used, citing the following reasons.
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Strategic Managers do not evaluate all the possible options open to them but choose between relatively few alternatives.
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It does not normally involve an autonomous strategic planning team that impartially sifts alternative options before choosing the best solution.
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Strategy making tends to involve smallscale extensions of past policy – ‘incrementals’ rather than radical shifts following a comprehensive search.
Lindblom believed that strategy making involving small scale extensions of past practices would be more successful as it was likely to be more acceptable as consultation, compromise and accommodation were built into the process. He believed that comprehensive rational planning was impossible and likely to result in disaster if actively pursued.
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Freewheeling opportunism
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Freewheeling opportunists do not like planning. They prefer to see and grab opportunities as they arise.
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Intellectually, this is justified by saying that planning takes too much time and is too constraining. Probably, the approach is adopted more for psychological reasons: some people simply do not like planning.
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Often such people are entrepreneurs who enjoy taking risks and the excitement of setting up new ventures. However, once the ventures are up and running, the owners lose interest in the daytoday repetitive administration needed to run a business.
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3 Levels of strategic planning Corporate, business functional levels
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Corporate Strategy
What business is the firm in? What businesses should it be in? These activities need to be matched to the firm’s environment, its resource capabilities and the values and expectations of stakeholders. How integrated should these businesses be?
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Business Strategy Looks at how each strategic business unit (SBU) attempts to achieve its mission within its chosen area of activity. Which products should be developed? What approach should be taken to gain a competitive advantage? Which markets to enter?
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Functional or Operational Strategy Looks at how the different functions of the business support the corporate and business strategies.
Note that it is not always clear and rarely important whether a decision is classified as corporate, business or functional.
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Consistency The strategies at the different levels should be consistent. There’s no point having a corporate strategy that says that the organisation should move up market, if the business strategy is to stay in cheap markets and operations provide lowquality products and services.
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Test your understanding 3
A fullservice airline is making the following decisions. (a) Should a ‘nofrills’, lowfare subsidiary be set up? (b) If it is set up, how should cabin staff be recruited? Are these likely to be strategic, business or operational decisions?
4 The Johnson, Scholes and Whittington model of strategic management
An overview The Johnson, Scholes and Whittington (JSW) model of strategic planning is a rational planning model (see section 'The rational 'top down' approach to strategic planning'). It consists of the three elements already discussed (analysis, choice, implementation) but instead of presenting these linearly, it recognises interdependencies. For example, it might only be at the strategy into action (implementation) stage that an organisation discovers something that sheds light on its strategic position.
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The strategic position/analysis Assessing the strategic position consists of analysing:
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the environment (competitors, markets, regulations, discoveries etc. Opportunities and threats)
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the strategic capability of the organisation (resources, competences. Strengths and weaknesses)
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the culture, beliefs and assumptions of the organisation the expectation and power of stakeholders (what do the shareholders want? Will employees cooperate?).
Note the last point – strategic planning and management cannot be achieved without regard to stakeholders.
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In a profitmaking organisation, management might have a choice of adopting a high risk/high return strategy or a low risk/low return strategy. It’s important to know which the shareholders want.
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In a notforprofit organisation, such as a hospital, managers need to know what the government and potential patients want. How much resource should go into heart operations, how much into hip replacement, etc.
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Strategic choice Strategic choice follows strategic analysis and is based upon the following three elements.
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Generation of strategic options, e.g. growth, acquisition, diversification or concentration.
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Evaluation of the options to assess their relative merits and feasibility. Selection of the strategy or option that the organisation will pursue. There could be more than one strategy chosen but there is a chance of an inherent danger or disadvantage to any choice made. Although there are techniques for evaluating specific options, the selection is often subjective and likely to be influenced by the values of managers and other groups with an interest in the organisation.
Strategic choices need to be made at every level, though obviously choices made at any particular level can influence choices at other levels.
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Corporate – the scope and direction of the organisation. Which businesses should it be in? Should the organisation change from being a manufacturer to a service provider? Which markets should it be in?
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Business – how to compete at the business level. Operational level – for example, whether an organisation should outsource components or make them itself.
In addition to deciding the scope and direction of an organisation, choices also need to be made about how to achieve the goal. Broadly, there are two ways in which a strategy can be pursued:
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internal development (organic growth) external development – merger/acquisition, joint venture, licensing.
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Strategy into action/implementation Implementing a strategy has three elements.
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Organising/structuring. For example, should the organisation be split into European, US and Asian divisions? How autonomous should divisions be?
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Enabling an organisation’s resources should support the chosen strategy. For example, appropriate human resources and fixed assets need to be acquired.
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Managing change. Most strategic planning and implementation will involve change, so managing change, in particular employees’ fears and resistance, is crucial.
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Illustration 1 – The JSW model of strategic planning Illustration – Johnson, Scholes and Whittington model of strategic planning A fullprice airline is considering setting up a ‘no frills’, lowfare subsidiary. The strategic planning process would include the following elements.
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chapter 1 Strategic position: competitor action, oil price forecasts, passenger volume forecasts, availability of cheap landing rights, public concern for environmental damage, effect on the main brand. Strategic choices: which routes to launch? Set up a service from scratch or buy an existing cheap airline? Which planes to use, what on board services to offer? Strategic implementation: how autonomous should the new airline be? How to recruit and train staff? Implementation of the internet booking system. Acquisition of aircraft. Obtaining landing slots.
Test your understanding 4
A health provider has only large, edge of town, hospitals. It is considering setting up additional small city centre clinics capable of treating lessserious day cases. Give examples of what the provider should consider under the headings of strategic position, strategic choices and strategic implementation.
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5 The strategy lenses
Johnson and Scholes talk about ‘strategic lenses’, which are three ways of viewing what can be meant by the term ‘strategy’. These are as follows.
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Strategy as design. This is the view that strategy formulation is a rational, logical process where information is carefully considered and predictions made. Strategic choices are made and implementation takes place. Essentially this is the same as the rational planning model discussed earlier.
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Strategy as experience. This is the view that future strategies are based on experiences gained from past strategies. There is strong influence from the received wisdom and culture within an organisation about how things should be done. This reflects the emergent approach described above.
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Strategy as ideas. This is the view that innovation and new ideas are frequently not thought up by senior managers at the corporate planning level. Rather, new ideas will often be created throughout a diverse organisation as people try to carry out their everyday jobs and to cope with changing circumstances.
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Johnson and Scholes suggest that viewing strategy through only one of these lenses can mean that problems that the other lenses might show up are missed. For example, too much reliance on incremental changes (strategy as experience) might overlook radical new developments that could be essential for the organisation’s success (strategy as ideas).
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It is worth considering the very strong influence the design and experience lenses have in large organisations and government departments. Often, the larger the organisation, the less able it is to adopt early essential but radical changes.
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Ideally, managers should try to look at strategy through all three lenses in turn.
Illustration 2 – The strategy lenses Choosing a family holiday A family is considering a holiday. The family has for many years gone to the same resort, ‘Golden Sands’ which has been perfectly suitable. Applying the strategic lenses to this modest planning exercise could result in the following approaches:
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Strategy as design. The family gets lots of holiday brochures and makes extensive queries on the internet. Checklists of family members’ requirements are drawn up and the holidays are scored against these. Careful budgeting exercises are carried out. The result of this rational, logical process is that another resort, ‘Emerald Coast’ seems to be a better fit to what the family needs.
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Strategy as experience. Despite the analysis carried out, the head of the family would like to return to Golden Sands. There is strong emotional attachment to that resort, the facilities and activities available are wellknown and holidays there have always been enjoyed.
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Strategy as ideas. An old school friend of the head of the family now lives abroad and has just emailed with the suggestion that the two families do a houseswap for a couple of weeks. Both families live in interesting and attractive areas of their countries and the house swap would be cheap, comfortable and interesting.
Of course, there is no right answer as to where the family should go on holiday, and assessment of the success of the holiday can only be carried out retrospectively. But one thing is clear, all three of the lenses have a part to play in trying to make a good decision.
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Test your understanding 5
What are the three strategic lenses? Apply them to the process of moving house.
6 Understanding the P3 syllabus Given the above discussion of business planning, how are we to understand the P3 syllabus? The examiner has emphasised the following aspects.
External and internal perspectives The P3 syllabus has two main perspectives:
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The external forces that shape the environment of an organisation: –
the behaviour of customers
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the initiatives of competitors
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the emergence of new laws and regulations.
The internal ambitions and concerns that exist within an organisation: – the desire for growth –
the design of processes
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the quality of products and services
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the competences of employees
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the financial resources.
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Three levels The P3 syllabus can be understood as functioning on three levels, as shown in the following relational diagram of main capabilities:
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Top layer – strategic analysis, choice and action The ‘top layer’ of the relational model reflects a largely external and strategic perspective of business analysis.It is more concerned with the long term direction and scope of an organisation:
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scanning the changing business environment
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looking to use the resources and competences of the organisation to achieve competitive advantage
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fulfilling the expectations of stakeholders.
Middle layer – implementation The ‘middle layer’ is an expansion of the implementation of strategy. Understanding the strategic position of an organisation and considering the strategic choices open to it are of little value unless the preferred strategies can be turned into organisational action. The middle layer should be perceived as both the implementation of strategy handed down from above, and the source of emergent strategies as employees go about their daily tasks Key aspects
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Process redesign and automation.
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Information technology and ebusiness.
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Quality assurance, control and initiatives.
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chapter 1 These three elements are interconnected. For example, many process redesign initiatives use information technology to achieve improvements in product or service quality. Process and quality initiatives have been significant in organisations for a very long time. Information technology has less of a pedigree but its impact on e business may yet make this the most influential element in the syllabus. Other aspects
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Project management – All three elements in the ‘middle layer’ require effective project management
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Financial aspects – Finally, strategic position, choices and implementation are all subject to financial benchmarks. Financial analysis explicitly recognises the importance of focussing on the key ratios and measures that may be used to assess the position of an organisation, the viability of a selected strategy and the monitoring and measuring of its success. This is very important; one suspects that many managers can come up with suitable, acceptable strategies that are not financially feasible!
Bottom layer – HR implications Successful strategies require effective recruitment, training, motivation and organisation of people. Business analysis is presented in the syllabus in three interrelated layers. It is important that candidates for the examination appreciate the links and connections between the parts. The syllabus encourages, as far as it can, a ‘systems’ perspective of an organisation. It encourages the notion that it may only be possible to understand any complex system, such as an organisation, by considering the whole of it, rather than focusing on any one individual part.
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7 Chapter summary
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Test your understanding answers
Test your understanding 1 The main challenge will come from the internet services both as ways of distributing news and as carriers of advertising. The challenges will grow when news material can be downloaded into convenient portable devices. Most large newspapers already have websites that carry each day’s articles, or a summary thereof. Newspapers will still have a role in collecting and reporting news but their method of distribution is likely to be different. In fact, distribution will be cheaper, and profits will still be available provided readers can be encouraged to pay for the service. However, there could be a large challenge to even the reporting of news, and therefore newspaper profits if news reporting were done on a ‘Wikipedia’ basis. Wikipedia is a free internetbased encyclopaedia in which generally authoritative articles are written and edited by a large number of volunteers. News reporting could be done on the same basis – nonprofessionals writing about matters that are of interest or that affect them. A biased or untrue story could, of course be written (and that can happen in newspapers too), but other writers could immediately produce a story with opposing or correct views. It is certainly not clear that truth would be an automatic casualty if news sites displayed such a potential diversity of material. Newspapers have already found a slump in advertising, particularly in classified, job ads and personal ads as advertisers move to specialist sites that can be searched for the most relevant items.
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Test your understanding 2 (a) Health service Strategic planning is vital. Hospitals are hugely expensive and take years to plan and build and their provision must be closely aligned with population trends and treatment advances. Training medical staff is also a longterm process. If hospital and other health service facilities are inadequate, many people will be adversely affected. (b) A small building contractor Relatively little longterm planning is needed. If the builder buys and develops land, then some planning will be needed to ensure that land and planning permission can be acquired. Otherwise, many builders work from job to job using a high proportion of sub contractors.
Test your understanding 3 (a) There will be very high costs involved, careful planning is needed to ensure that the cheap flights do not cannibalise the expensive service. This is a decision that would be made by the main board and is strategic. (b) The nature of this decision is less clear. It’s probably a business level decision that would be delegated to the management team of the new subsidiary.
Test your understanding 4 Suggestions are: Strategic position: likely demand. Some type of cost/benefit analysis to show that the strategy is worthwhile. Safety of patients being treated in less wellresourced environments. Acceptability to patients. Acceptability to staff. Strategic choices: which illnesses to treat? Where should the clinics be? How should the clinics be staffed? Opening hours? Strategic implementation: acquiring and fitting out clinics. Hiring and/or transferring staff. Publicity, so that patients know where and when to go. Liaison with general practitioners and the main hospitals.
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Test your understanding 5 The three strategic lenses are:
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strategy as design strategy as experience strategy as ideas.
Applying these lenses to the process of moving house: Strategy as design Investigate the following:
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schools commuting method, distance, time, cost prices area improving local amenities local development plans.
Strategy as experience ‘I like the area I’m living in. I know it well and I have friends who live locally. I certainly don’t want to move far.’ Strategy as ideas ‘Let’s move away from the city to the countryside. I need a change and this could improve our quality of life.’
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The environment and competitive forces Chapter learning objectives When you have completed this chapter you will be able to:
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apply the PESTEL model in a scenario apply Porter’s diamond in a scenario describe what is meant by ‘convergence’ in industries evaluate an industry sector using Porter’s five forces model apply the lifecycle model to an industry sector analyse the influence of strategic groups analyse the influence of market segmentation using PESTEL, Porter’s five forces and other suitable models, categorise environmental effects as opportunities or threats.
How can an organisation assess the effect its environment has on it?
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1 Introduction If a strategic plan is going to have any chance of being useful, it has to be based on gathering and analysing information. It is not possible to plan by sitting in a darkened room, dreaming up scenarios that have no connection to reality. This chapter describes some of the planning tools that can help.
2 The PESTEL model The PESTEL model looks at the macroenvironment, using the following headings:
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Political. The political environment includes taxation policy, government stability and foreign trade regulations.
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Economic. The economic environment includes interest rates, inflation, business cycles, unemployment, disposable income and energy availability and cost.
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Social. The social/cultural environment includes population demographics, social mobility, income distribution, lifestyle changes, attitudes to work and leisure, levels of education and consumerism.
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Technological. The technological environment is influenced by government spending on research, new discoveries and development, government and industry focus of technological effort, speed of technological transfer and rates of obsolescence.
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Ecological/environmental. The ecological environment, sometimes just referred to as ‘the environment’, considers ways in which the organisation can produce its goods or services with the minimum environmental damage.
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Legal. The legal environment covers influences such as taxation, employment law, monopoly legislation and environmental protection laws.
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Illustration 1 – PEST analysis for an airline Illustration – The PESTEL model An airline is planning for the next five years. The following would be some of the PESTEL factors it should consider:
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Political influences: political unrest, terrorism, landing rights in foreign countries.
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Economic influences: oil prices, exchange rates, taxation (for example VAT on fuel), economic boom or depression (airline revenues are very sensitive to business traffic).
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Social influences: changes in population size, fashion (for example, increasing willingness to go on short breaks).
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Technological influences: engine efficiency, new aircraft being planned, better and cheaper video conferencing.
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Environmental/ecological influences: concern about the impact of carbon emissions from jet engines, noise, resistance to airport expansion.
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Legal influences: health and safety regulations, consumer legislation (for example, compensation for cancelled flights), security regulations.
Note that it does not matter under which category an influence has been listed. Tax has economic, legal and political dimensions. All that matters is that tax has been considered in the environmental scan.
Test your understanding 1
Carry out a PESTEL analysis on a supermarket business. Try to get at least two items under each heading.
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3 Porter’s diamond Porter tried to answer the following questions:
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Why does a nation become the home base for successful international competitors in an industry? Germany is renowned for car manufacture; Japan is prominent in consumer electronics.
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Why are firms based in a particular nation able to create and sustain competitive advantage against the world’s best competitors in a particular field?
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Why is one country often the home of so many of an industry’s world leaders?
Porter called the answers to these questions the determinants of national competitive advantage. He suggested that there are four main factors which determine national competitive advantage and expressed them in the form of a diamond.
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Factor conditions. Factor conditions include the availability of raw materials and suitable infrastructure.
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Demand conditions. The goods or services have to be demanded at home: this starts international success.
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Related and supporting industries. These allow easy access to components and knowledge sharing.
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Firm strategy, structure and rivalry. If the home market is very competitive, a company is more likely to become world class.
Illustration 2 – Porter’s diamond Would a manufacturer of fourwheeldrive vehicles be likely to become world class if based in Scotland?
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Factor conditions: rugged wet terrain with harsh winters mean that fourwheeldrive vehicles are required.
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Demand conditions: many local people would certainly demand them and would be very discerning of differences in quality.
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Related and supporting conditions: the automotive components industry is not strong in Scotland.
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Firm strategy, structure and rivalry: not much rivalry, so no structural advantages.
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Although factor conditions provide the right environment and home demand would be strong, the other elements of the diamond are missing.
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Test your understanding 2
Apply Porter’s diamond to the US personal computer (PC) industry.
4 Convergence in industries The PESTEL influences may effect every industry, but industries will vary in how much they are affected. For example, an interest rate rise is likely to affect a business selling cars (car purchase can be postponed) more than it will affect a supermarket (food purchase cannot be postponed). More detailed analysis of the environment and competitive forces will be focused on specific industries.
Definition:
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An industry is a group of firms selling the same principal product, or products which are close substitutes.
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A sector extends the idea of industry into the public services.
However, the boundaries of an industry or sector can change through the convergence of previously separate industries. Convergence can be analysed in terms of whether it is supply led or demand (market) led and also whether there is convergence in substitutes or convergence in complements, e.g. products/services that complement each other.
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Supplyled, where producers try to see connections between separate industries or sectors, e.g. supermarkets offering retail banking.
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Marketled, where buyers see or want connections between separate industries or sectors, e.g. customers in a book store also wanting to browse CDs and DVDs.
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Convergence in substitutes, where one technology can replace another, e.g. mobile phones and landline phones.
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Convergence in complements, where two technologies work better together, e.g. Panasonic (electronics) and Leica (lenses) producing digital cameras.
The four influences can be shown as a matrix:
Illustration 3 – Convergence in industries In the 1980s many retail banks and building societies took over established estate agencies. Their reasoning was that these were complementary offerings: people buy houses and they need mortgages. This convergence was supplier led; customers were quite happy to go to one supplier for a property and another for a loan. Surprisingly, perhaps, this attempted convergence never really succeeded.
Test your understanding 3
Consider the scope and pressures for industry convergence with respect to: (1) supermarkets and biotechnology companies (2) telecoms companies and entertainment companies.
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5 Porter’s five forces model Porter looked at the structure of industries. In particular, he was interested in assessing industry attractiveness, by which he meant how easy it would be to make above average profits (for shareholders and to fund adequate investment). He concluded that industry attractiveness depends on five factors or forces:
Key point
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Illustration 4 – Porter's five forces Illustration – Porter’s five forces model Threat of new entrants Many ‘cheap flight airlines’ have started up in the last ten years or so, despite there being considerable barriers to entry: Capital costs, knowhow, government regulation (in all countries served), landing rights.
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The environment and competitive forces Threat of substitutes It can be difficult to predict and therefore guard against the emergence of substitutes. Traditional landline phone companies enjoyed a considerable barrier to entry because of the capital cost that would be incurred installing a new landline infrastructure. Then, cell phone technology emerged and suddenly it was relatively cheap and fast to provide a substitute telephone service. Power of buyers Many audit firms have major clients who can exert considerable pressure on fees. Power of suppliers The large supermarket chains such as Sainsbury and Tesco have great bargaining power with their suppliers as they can purchase a very large proportion of the suppliers’ total sales. A monopoly supplier of a vital component will be able to exert huge bargaining power. Not everyone regards haute couture clothing as vital, but some consumers do and this puts the big fashion houses with strong brands and design skills, such as Dior, Chloe and Versace, in a powerful position that enables them to charge very high prices. Rivalry An example of an industry sector with high competition is the PC business. The products are often seen as commodities (at least by home buyers) so there is little brand loyalty. Fixed costs are high and growth rates have declined. Profitability became so low that IBM sold off its laptop business to Lenovo. Even Dell, famed for efficient manufacturing and quality, is having to work harder to make good profits. Apple computers are interesting in this regard. On one level, Apple has a monopoly because of the remarkably high style value of its machines, its unique operating system and powerful graphics. Apple was able to keep its margins higher though, of course, it sold fewer machines.
Test your understanding 4
Apply a five forces analysis to a company that does garden maintenance for households cutting grass, removing weeds, pruning shrubs, etc.
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6 The life cycle model The product life cycle analysis is a technique used to plot the progress of a product through its life span. The model can be used to assess an individual firm's products (e.g. the iPod Classic), a type of product (e.g. CRT televisions) or an industry (e.g. movies). It is important in exam questions that you recognise the appropriate lifecycle stage and discuss the implications within the context of the scenario. The model can show between four and six stages. Here, we show four stages:
• • • •
introduction growth maturity decline.
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Typical characteristics of these stages are set out in the following table: Industry features Competition
Demand
Introduction Growth
Maturity
Decline
Few players Many new entrants and mergers/ takeovers. Fight for market share. Usually Increasing higher market income penetration buyers
Shakeout leaves only a few large players
Heavy discounting and price wars
Growth rate falls, Falling most purchases demand now replacement or repeat buying. Well informed, demanding buyers Technology Nonstandard Narrowing in Knowledge is Knowledge is the range of well understood well technologies by all players in understood applied the market by all players in the market Product Differences Improvement Standardisation Less characteristics in choice, in the design of products with emphasis on inconsistent and quality only small product quality differentiations differentiation Production Short Mass Overcapacity High processes production production begins to incidence of runs with develop; long overcapacity specialised production runs distributors Critical Innovative Products are Efficiency in Brand loyalty success product able to be factors mass operations to Low produced keep costs low overheads
Illustration 5 – The life cycle model PCs Initially, there were relatively few significant producers. The product was innovative, nonstandardised, of inconsistent quality and expensive.
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chapter 2 Once it looked as though it would be a successful product many producers were attracted into the market. Mass production lowered prices. The range of technologies used narrowed. Intense competetion developed as firms fought for dominance and market share. Maturity means that the product has become a commodity. The industry will be left with just a few large players (Dell, Hewlett Packard, etc.). Efficiency is very important to maintain margins. New entrants will be rare as there is little point in entering an old market. Decline. Some companies will find that their exit costs are high and will be willing to manufacture so long as marginal revenue exceeds marginal costs. Price wars are likely.
Test your understanding 5
Consider where the following items might be in the product life cycle and comment on the competitive forces they might experience: (a) mobile phone services (b) flat screen (LCD/plasma) televisions.
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7 The influence of strategic groups Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases. Strategic group analysis is a help to understanding the competitive structure of an industry:
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Against whom is an organisation directly competing?
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Identify potential opportunities and threats.
How possible, or likely, is it for an organisation to change strategic groups? A set of strategic groups generally includes a set of mobility barriers that inhibit or prevent organisations from moving to another group, e.g. lowcost production, brand names, low overheads or a local customer base.
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•
Reduce the set of relevant competitors. Many industries contain many more competitors than can be analysed individually. Often it is simply not feasible to consider 30 competitors, to say nothing of hundreds. Reducing this set to a smaller number in a strategic group makes the analysis easier.
A strategic group could:
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have similar characteristics, e.g. size
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have similar assets and skills, e.g. quality image.
pursue similar competitive strategies over time e.g. heavy advertising and the use of the same distribution channel or
Illustration 6 – The influence of strategic groups The soup industry has national brands (such as Heinz, Baxters, Campbells) price leaders, ownlabel suppliers (such as the major supermarkets) and smaller, premium brands selling highquality chilled soups.
The concept of strategic groups is important because one way to develop a sustainable competitive advantage is to pursue a strategy that is protected from competition by assets and skills that represent barriers to competitors. It also helps to gain a better understanding of the bases of rivalry within strategic groups and how it differs from that within other groups. Steps in strategic group analysis
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Select appropriate axes: different for each industry, they should not be related to one another and should distinguish between companies in the industry.
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Plot companies.
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Explain why companies seem to form groups.
Interpret. Identify groups and spaces. Strategic space is the term given to gaps that do not appear to be covered in the map.
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Illustration 7 – Strategic groups Illustration – The influence of strategic groups The analysis below illustrates the local grocery market.
The two critical success factors here are price and quality. Of course, others, such as location, opening hours, marketing expenditure and so on, might be important too under some circumstances.
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Group 1 are the price discounters. The business cuts costs wherever it can. Product ranges are restricted and there are few attempts to make the store decorative or its service friendly.
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Group 2 are the main market retailers. They compete on price, but offer more and better ranges, better customer service and so on.
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Group 3 offer a higherquality range, and do not attempt to compete on price at all.
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Group 4 are delicatessens. They offer a great deal of service and specialist items. Prices are very high.
A strategic space is shown to the right of strategic Group 1, beneath strategic Group 2. This implies the existence of a group of customers that appreciate low prices, but also want the benefits associated with higher quality including choice, service, and a more pleasant shopping environment. Group 2, the main market retailers, has been quicker to move into this, by simply adding a budget range to its own branded goods.
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Expandable text
Test your understanding 6
What strategic groups might exist in the morning newspaper business and how are they distinguished?
Expandable text The influence of market segmentation
8 Environmental opportunities and threats This chapter has looked at a number of tools (or models) that can be used to help to make sense of the environment:
• • • • • • •
PESTEL Porter’s diamond Convergence in industries Porter’s five forces The life cycle model The influence of strategic groups The influence of market segmentation.
The results of these analyses can be classified as either an:
• •
opportunity or a threat.
Once categorised as an opportunity or threat the influences first need to be:
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prioritised, e.g. some will be much more important than others.
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Then the organisation has to decide how to:
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grab the best opportunities defend against the most serious threats.
There is absolutely no point in identifying opportunities and threats, but do nothing about them.
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Test your understanding 7
Perform an opportunities and threats analysis on: (1) a passenger train service (2) a nuclear power station.
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9 Chapter summary
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Test your understanding answers
Test your understanding 1 Here are our suggestions. You might have other valid ones. Political influences: planning policy on large outoftown sites, competition policy. Economic influences: unemployment rate, interest rates, taxation. Social influences: changes in population sizes, changes in consumer taste (for example, possibly more health conscious). Technological influences: the internet (internet ordering), sophisticated JustInTime systems, food packaging technology. Environmental/ecological influences: use of land for building, sustainable resources, packaging, animal welfare. Legal influences: health and safety regulations, consumer legislation, food packaging regulations, inclusion of additives in food.
Test your understanding 2 Factor conditions: large population of welltrained engineers. Demand conditions: large population of individuals and businesses who need or want PCs. Related and supporting industries: many component manufacturers close by; large and wellendowed universities. Firm strategy, structure and rivalry: an entrepreneurial economy allowed many startups and the best survive the intense rivalry.
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Test your understanding 3 (1) Biotechnology companies can produce animals and plants with specific characteristics which could increase yield, flavour and shelf life. There is considerable consumer resistance to genetically modified crops so this would certainly be a supplyled move to complements. (2) This has already happened to some extent. The supply of downloaded digital entertainment (music, film, blogs) has increased greatly and will probably continue to do so. The supply channel is telecoms. There are obvious potential complements. It is not clear whether it is supply or market driven, but many consumers would welcome very fast broadband to watch good definition films on demand.
Test your understanding 4 A garden maintenance company Threat of entry: high. Only modest amounts of capital and knowhow are needed. No regulations, hard to differentiate, and limited scope for economies of scale. Threat of substitute products: low, except for householders who opt for a very lowmaintenance garden and for customers who choose to look after their own gardens. Bargaining power of customers: low. There will be many small customers so individual bargaining power will be low. Quality is perhaps not a vital component of the service. Bargaining power of suppliers: low. The supplies needed are widely available. Competition: high. The business is very easy to get into. There are negligible switching costs.
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Test your understanding 5 (a) Mobile phone services Probably a mature market. The industry went through a very rapid growth stage in many countries; most consumers who want a mobile now have one. There has been consolidation in the industry which, because of the infrastructure needed, lends itself to supporting a few large suppliers. It is relatively unlikely that new entrants will appear as they will have to fight for a share of a saturated market. Consumers are well informed about call plans and about what competitors offer. Because a telephone number can be retained there are very low switching costs and consumers are happy to change suppliers. No sign of decline. (b) Flat screen (LCD/plasma) televisions Probably still in the growth stage. There is a long way still to go before most conventional TVs are replaced. Prices had been very high initially, but have come down significantly as competition intensifies and manufacturing runs become longer. New entrants would remain a threat as there would still be significant market share to win. Prices will continue to fall and manufacturing efficiency will become increasingly important.
Test your understanding 6 Possible strategic groups are:
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the tabloids which are relatively cheap. Lots of pictures. Not much serious reporting.
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the socalled ‘broadsheets’ (though many are now in tabloid format). More expensive. Large amounts of reporting and editorial compared to pictures.
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the free papers. Small, chatty, enough reading to entertain you on the journey to work. No heavy editorials. High number of advertisements.
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Test your understanding 7 (1) A passenger train service Threats
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losing the franchise or right to operate the service (if the service is provided by a private company)
• • •
underinvestment in the network infrastructure
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competing services.
terrorism increased affluence in some countries leading to less use of trains as people acquire cars
Opportunities
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increasing cost of petrol making cars more expensive to run
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new technology, e.g. magnetic levitation; generally reduced journey times.
environmental concerns and regulation building customer loyalty, e.g. perhaps a scheme similar to air miles innovative fares for different market segments new routes which are very expensive to develop but once established might be barriers to entry of competitors
(2) A nuclear power station Threats
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• • • • •
environmental concerns about the nuclear industry
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global warming, e.g. less fuel needed to heat homes and offices.
terrorism theft of nuclear material accidental release of radioactive material alternative energy sources (e.g. biotechnology might provide a very efficient way of creating fuel from sunlight)
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Opportunities
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political risks associated with reliance upon Middle Eastern and Russian supplies of fossil fuels
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environmental concerns about greenhouse gas emission from fossil fuel use
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global warming, e.g. more fuel needed to cool homes and offices growing world demand for power new technology to deal safely, and permanently, with radioactive waste.
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Marketing and the value of goods and services Chapter learning objectives Upon completion of this chapter you will be able to:
• • • • •
analyse customers and markets in a commercial setting develop suitable CSFs for products and services apply the value chain in a scenario describe the meaning of value networks in a commercial setting describe the three different types of benchmarking (historical, industry/sector, bestinclass).
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1 Customers and markets Market analysis A key aspects of strategy development is the identification of, and then meeting of, customer needs.
Expandable text
Customer analysis A customer may be an organisation, such as a hospital or government agency; a business firm, such as a distributor or manufacturer; or an individual consumer. There are three sets of strategic questions that are used to analyse customers – segmentation, motivation and unmet needs. Segmentation – sets of strategic questions include the following.
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Who are the biggest, most profitable existing customers and who are the most attractive potential customers?
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Do the customers fall into any logical groups on the basis of characteristics, needs or motivations?
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Can the market be segmented into groups requiring a unique business strategy?
Motivation – concerns the customers’ selection and use of their favourite brands, the elements of the product or service that they value most, the customers’ objectives and the changes that are occurring in customer motivation. 44
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Markets and segmentation One aim of segmentation is to identify groups of customers who share similar needs for targeting. Traditional segmentation focuses on identifying customer groups based on a number of variables that include:
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geographic variables, such as region of the world or country, country size, or climate
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demographic variables, such as age, gender, sexual orientation, family size, income, occupation, education, socioeconomic status, religion, nationality/race, and others
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psychographic variables, such as personality, lifestyle, values and attitudes
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behavioural variables, such as benefit sought (quality, low price, convenience), product usage rates, brand loyalty, product end use, readinesstobuy stage, decisionmaking unit, and others.
Valuebased segmentation looks at groups of customers in terms of the revenue they generate and the costs of establishing and maintaining relationships with them.
Illustration 1 – Customers and markets The market for package holidays can be split up into a variety of different submarkets – the family market, the elderly market, the young singles market, the activity holiday market, the budget holiday market, etc. Because it would be virtually impossible to provide one single product that would satisfy all people in all markets, an organisation can tailor its marketing approach with a specific product and go for:
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undifferentiated marketing – one product and one market with no attempt to segment the market, e.g. sugar is a product that is marketed in a relatively undifferentiated way
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differentiated marketing – the market is segmented with products being developed to appeal to the needs of buyers in the different segments, e.g. Toyota offers a wide range of different types of vehicle (sports car, 4x4, estate) in response to differing customer needs
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niche or target marketing – specialising in one or two of the identified markets only, e.g. Ferrari only make expensive luxury sports cars.
Expandable text
Test your understanding 1
Segmentation can also be applied to a services market. How might accountants or lawyers specialise?
Marketing mix strategies Each market segment can become a target market and would require a unique marketing mix for the organisation to exploit it properly.
The marketing mix is the set of controllable variables that the firm can use to influence the buyers’ responses (Kotler).
The variables are commonly grouped into four classes that McCarthy refers to as ‘the four Ps’ – product, price, promotion and place (or distribution): Product
• • • • • • • •
Price
• • Packaging • Features • Brand name
Options Quality
•
Warranty
Level
Promotion
Place
•
• • • • •
Distribution
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Sales territories
• •
Inventory levels
Discounts Allowances Payment terms Delivery options
Sales promotion
•
Personal selling
• •
Publicity Advertising
Service Style appeal
channels Distribution coverage Outlet locations
Inventory locations
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Illustration 2 – Customers and markets In the creation of a brand strategy, an organisation needs to be aware of the effect the brand name can have on the product or service. Some fortunate companies have had their name adopted for the product, regardless of the manufacturer, e.g. Hoover instead of vacuum cleaner and Sellotape instead of sticky tape. Market research in the UK has shown that most people believe that an organisation that has a good reputation would not sell poorquality products. This is a competitive advantage for those companies when it comes to promoting new products.
Test your understanding 2
Suggest how the marketing mix might differ for a consumer product in the first two stages of the product’s life cycle.
2 Critical success factors What are critical success factors? Critical success factors (CSFs) are performance requirements that are fundamental to an organisation’s success. In this context CSFs should thus be viewed as those product features that are particularly valued by customers. This is where the organisation must outperform competition. Examples of CSFs for major industries include:
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in the automobile industry – styling, an efficient dealer network, organisation, performance
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in the food processing industry – new product development, good distribution channels, health aspects (e.g. low fat)
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in the life insurance industry – reputation, innovative new policies in the supermarket industry – the right product mix available in each store, having it actually available on the shelves, pricing it correctly.
Measured targets for CSFs are called key performance indicators (KPIs).
Test your understanding 3
What might a parcel delivery service such as DHL identify as its two main critical success factors?
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Developing suitable critical success factors
In developing CSFs from customer needs, the following issues should be borne in mind:
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Customers’ buying decisions are often complex and may involve a wide range of motivating factors. CSFs need to focus on the most important factors that ultimately determine the buying decision. Using IT systems to understand customer needs is particularly important in consumer markets.
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Many factors are taken for granted by customers (e.g. fitness for purpose). These give rise to ‘threshold’ features – i.e. all products must have these simply to enter the market.
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CSFs will vary from segment to segment. The organisation will need to assess its strategic capabilities to identify which segments it should target.
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Customers’ understanding of value can vary over time, so the organisation needs to be open to changing the monitored CSFs.
Example: buying a new car
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Motivating factors include brand, image, price, service interval, running costs, safety, warranty, performance, reliability, dealer network, availability and cost of extras (e.g. airconditioning, leather seats), fuel economy, economic footprint, depreciation, etc.
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Reliability is likely to be a threshold product feature.
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Families may be more concerned about safety whereas single young males, image and performance.
Corporate purchasers may focus more on price (including discounts), running costs and depreciation.
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Illustration 3 – Critical success factors The following is an example of CSFs developed for a shipping terminal. Critical success Indicator factor
Mechanism for measurement
Health and safety •
Accident record
•
•
Industrial injuries
Factory inspector's reports
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Accidents reported Complaints register
Customer satisfaction
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Complaints Stock losses
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Accessibility to site
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Reported delays
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Inspection
Maintenance of premises
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Repair costs
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Inspection
Down time
• •
Inspection
Efficient plant use •
Insurance claims
Correspondence Internal audit
Quayside tidiness
Repair bills
Traceability of documents
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Outturn reports
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Manifest checks
Efficient use of staff
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Time standards for loading and unloading
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Training schedules
Test your understanding 4
Using the CSFs previously identified for a parcel delivery company such as DHL, explain how the company might measure their performance.
3 Value chain analysis Once CSFs have been identified, the firm needs to analyse whether and where it is adding value (as perceived by customers) to products.
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The value chain Porter developed the value chain to help identify which activities within the firm were contributing to a competitive advantage and which were not. The approach involves breaking down the firm into five ‘primary’ and four ‘support’ activities, and then looking at each to see if they give a cost advantage or quality advantage.
Primary activities:
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Inbound logistics – receiving, storing and handling raw material inputs. For example, a justintime stock system could give a cost advantage.
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Operations – transformation of the raw materials into finished goods and services. For example, using skilled craftsmen could give a quality advantage.
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Outbound logistics – storing, distributing and delivering finished goods to customers. For example, outsourcing delivering could give a cost advantage.
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Marketing and sales – for example, sponsorship of a sports celebrity could enhance the image of the product.
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Service – all activities that occur after the point of sale, such as installation, training and repair, e.g. Marks & Spencer’s friendly approach to returns gives it a perceived quality advantage.
Secondary activities:
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Firm infrastructure – how the firm is organised. For example, centralised buying could result in cost savings due to bulk discounts.
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Technology development – how the firm uses technology. For example, the latest computercontrolled machinery gives greater flexibility to tailor products to individual customer specifications.
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Human resources development – how people contribute to competitive advantage. For example, employing expert buyers could enable a supermarket to purchase better wines than competitors.
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Procurement – purchasing, but not just limited to materials. For example, buying a building out of town could give a cost advantage over high street competitors.
All organisations in a particular industry will have a similar value chain, which will include activities such as:
• • • • •
obtaining raw materials designing products building manufacturing facilities developing cooperative agreements providing customer service.
It is vital that the linkages between the different elements of a value chain are considered. Firstly this is to ensure consistency – for example, a differentiator will want to ensure that any cost advantages within the value chain do not compromise overall quality. Secondly it may be that through linking separate activities more effectively than competitors, a firm can gain a competitive advantage.
Test your understanding 5
Identify the primary activities in the value chain for a publisher of educational study guides.
Apply the value chain in a scenario To gain a competitive advantage over its rivals a company must either:
• •
perform value creation functions at a lower cost than its rivals or perform them in a way that leads to differentiation and a premium price.
In an exam situation you might use Porter’s value chain analysis to decide how individual activities might be changed to reduce costs of operation or to improve the value of the organisation’s offerings.
Value chain analysis looks at each of the processes that make up the chain of activity and:
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rates how important it is in a given company’s production or service activity
• •
rates how the company compares to its competitors
•
helps to improve the value of the organisation’s offerings.
helps to decide how individual activities might be changed to reduce costs of operation
For example, a clothes manufacturer may spend large amounts on:
• • • •
buying good quality raw materials (inbound logistics) handfinishing garments (operations) building a successful brand image (marketing) running its own fleet of delivery trucks in order to deliver finished clothes quickly to customers (outbound logistics).
All of these should add value to the product, allowing the company to charge a premium for its clothes. Another clothes manufacturer may:
•
reduce the cost of its raw materials by buying in cheaper supplies from abroad (inbound logistics)
• •
making all its clothes by machinery running 24 hours a day (operations) delay distribution until delivery trucks can be filled with garments for a particular request (outbound logistics).
All of these should allow the company to be able to gain economies of scale and be able to sell clothes at a cheaper price than its rivals.
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Illustration 4 – Value chain analysis Marks & Spencer plc compete in the food and grocery market by configuring their value chain to give a differentiated service.
Whereas Kwik Save compete by cost leadership in the same market.
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Test your understanding 6
Draw Porter’s value chain, identifying the areas that show where the key tasks, underpinning the critical success factor of customer care, will appear on it.
Value networks The organisation’s value chain does not exist in isolation. There will be direct links between the inbound logistics of the firm and the outbound logistics of its suppliers, for example. An understanding of the value system and how the organisation’s value chain fits in to it will therefore aid in the strategic planning process.
A value network is a web of relationships that generates economic value and other benefits through complex dynamic exchanges between two or more individuals, groups or organisations.
•
Tangible value exchanges – involve all exchanges of goods, services or revenue, including all transactions involving contracts and invoices, return receipt of orders, request for proposals, confirmations or payment.
•
Intangible knowledge exchanges – include strategic information, planning knowledge, process knowledge, technical knowhow, collaborative design, policy development, etc.
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Test your understanding 7
Supersounds is a small record company. Representatives from Supersounds scour music clubs for new bands to promote. Once a band has signed a contract (with Supersounds) it makes a recording. The recording process is subcontracted to one of a number of recording studio firms that Supersounds uses regularly. (At the moment Supersounds is not large enough to invest in its own equipment and studios.) Supersounds also subcontracts the production of records and CDs to a number of manufacturing companies. Supersounds then distributes the CDs to selected stores, and engages in any promotional activities required. What would you say were the activities in Supersounds’ value chain?
Illustration 5 – Value chain analysis Amazon, for example, not only revolutionised the business model for selling books, but also formed an entire new value network of suppliers and buyers that redefined the value chain for acquiring books and music. Replacing the retail bookstore with a website and the ‘over the counter’ delivery process with FedEx and UPS delivery created a new value network that delivered customer convenience and an entirely different and lowercost business model.
Test your understanding 8
How might the owner of a restaurant create value?
4 Benchmarking Why benchmark? Benchmarking is the process of systematic comparison of a service, practice or process. Its use is to provide a target for action in order to improve competitive position. Benchmarking involves answering the questions:
• • • •
How do we compare? Who performs better? Why are they better? What actions do we need to take in order to improve our performance?
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Marketing and the value of goods and services The main benefits include:
•
improved performance and added value – benchmarking identifies methods of improving operational efficiency and product design and helps companies focus on capabilities critical to building strategic advantage
• •
improved understanding of environmental pressures
• • •
a creative process of change
improved competitive position – benchmarking reveals a company’s relative cost position and identifies opportunities for improvement a target to motivate and improve operations increased rate of organisational learning – benchmarking brings new ideas into the company and facilitates experience sharing.
Illustration 6 – Benchmarking When doing a benchmark study, success will hinge on the level of commitment from top managers, who must take their blindfolds off and realise that dramatic change needs to be made in certain areas.
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The process may go through the following stages:
Managers need to be as specific as possible when identifying areas to benchmark. For example, if a company is interested in studying customer service, it needs to determine what specific area or activity within customer service needs to be examined. Customer service encompasses a broad base of activities, such as order taking, answering inquiries, handling irate customers, issuing credits, or invoicing. Each of these activities is different, each with its own thought processes, techniques and management controls.
Types of benchmarking Managers compare the performance of their products or processes externally with those of competitors and bestinclass companies and internally with other operations within their own firms that perform similar activities.
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There are various types of benchmarking: Strategic benchmarking
•
involves considering highlevel aspects such as core competencies, developing new products and services and improving capabilities for dealing with changes.
Historical benchmarking
•
internal benchmarking involves seeking partners from within the same organisation, e.g. from business units located in different areas. Rank Xerox radically improved time taken to develop its new products by benchmarking against Xerox’s Japanese subsidiary, Fuji Xerox.
Industry/sector benchmarking
•
performance benchmarking (or competitive benchmarking) is used where organisations consider their positions in relation to performance characteristics of key products and services. Benchmarking partners are drawn from the same sector
•
functional benchmarking is used when organisations look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar functions or work processes.
•
external benchmarking involves seeking outside organisations that are known to be bestinclass – it provides opportunities of learning from those who are at the leading edge, although it must be remembered that not every best practice solution can be transferred to others
•
process benchmarking is used when the focus is on improving specific critical processes and operations – partners are sought from best practice organisations that perform similar work or deliver similar services.
•
used where partners are sought from other countries because best practitioners are located elsewhere in the world and/or there are too few benchmarking partners within the same country to produce valid results.
Bestinclass benchmarking
International benchmarking
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Illustration 7 – Benchmarking Xerox used process benchmarking in the early 1980s to help correct a serious cost deficiency. To obtain costreducing ideas, they attempted to identify organisations in other industries that were particularly good in functional areas similar to those at Xerox. For example, LL Bean, a sportswear retailer and mail order house, became one of the models for the warehouse operations because they also dealt with products that were diverse in shape, size and weight. Altogether Xerox made six warehouse benchmark studies, which helped it improve its annual productivity gains in the logistics and distribution area. Companywide efforts of this type meant that Xerox overcame a cost gap with respect to Japanese manufacturers.
Test your understanding 9
Outline the advantages of internal benchmarking compared with the other types.
Dangers of benchmarking
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‘you get what you measure’ – managers may learn to direct attention at what gets benchmarked rather than at what is important strategically
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Benchmarking does not always reveal the reasons for good/poor performance
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Managers need to be aware that a benchmarking exercise can appear to threaten staff where it appears that benchmarking is designed to identify weaknesses in individual performance rather than how the process itself can be improved. To alleviate this fear, managers need to be involved in the benchmarking exercise and provide reassurance to staff regarding the aims and objectives of benchmarking.
•
In today’s environment, the more innovative companies are less concerned with benchmarking numbers (for example, costs or productivity) than they are with focusing on the processes. If a company focuses on the processes, the numbers will eventually self correct.
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5 Chapter summary
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Test your understanding answers
Test your understanding 1 Accountants or lawyers might choose to specialise in serving customers in a particular type of business. An accountant may choose to specialise in the accounts of retail businesses and a firm of solicitors may specialise in conveyance work for property development companies.
Test your understanding 2 In the introduction phase. Product
• •
Price
Build • Develop • product the market awareness and distribution Where channels applicable, obtain protection for intellectual property rights (patents, etc.)
•
Place
Promotion
Possibly • choose a market penetration pricing strategy, or a ‘price skimming’ (high price) market strategy
promotions should be aimed at innovators and early adopters in the customer population: develop product awareness
Establish the brand and the quality to be associated with the brand
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Marketing and the value of goods and services In the growth phase. Product
Place
Price
•
• Add
•
•
Build the brand Maintain product quality, but add additional features to create product differentiation
distribution channels
Promotion
Keep prices unchanged: sales growth is rising therefore there is no need yet to change pricing strategy
1
Promotion should aim now at a broader audience of potential customers
Test your understanding 3 The two main critical success factors would probably be:
•
speedy collection from customers after their request for a parcel to be delivered
•
rapid and reliable delivery.
Test your understanding 4 Their performance can be measured by establishing key performance indicators for each CSF and measuring actual achievements against them, e.g.:
•
Collection from customers within 3 hours of receiving the order, in any part of the country, for orders received before 2.30pm on a working day.
• •
Nextday delivery for 100% of parcels to destinations within the UK. Delivery within 2 days for 100% of parcels to destinations in Europe.
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Test your understanding 5 Inbound Operations Outbound logistics logistics
Marketing and sales
Service
Publisher receives the new syllabus for a study guide
Sale of study guides to intermediaries (bookshops) or direct (schools, colleges and universities)
After sales service: taking back returned (unsold) copies
The material is written or assembled by author
Warehousing and distribution of study guides
The publisher edits what the author has prepared The guide is prepared for printing
Test your understanding 6
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Test your understanding 7 Supersounds is involved in the record industry from start to finish. Although recording, CD manufacture and distribution are contracted out, these activities are part of Supersounds’ own value chain. Supersounds earns its money by managing the whole set of activities from recording to promotion.
Test your understanding 8 Ways to create value include the following:
•
the restaurant can become more efficient, by automating the production of food, as in a fast food chain
•
the chef can develop commercial relationships with growers, so he or she can obtain the best quality fresh produce
•
the chef can specialise in a particular type of cuisine (e.g. Greek, Thai)
•
the restaurant can be sumptuously decorated for those customers who value ‘atmosphere’ and a sense of occasion, in addition to the restaurant’s purely gastronomic pleasures
•
the restaurant can serve a particular type of customer (e.g. celebrities).
Each of these options is a way of organising the activities of buying, cooking and serving food in a way that customers will value.
Test your understanding 9 The main advantages of internal benchmarking are that access to sensitive data and information are easier; standardised data is often readily available; and, usually less time and resources are needed. There may be fewer barriers to implementation as practices may be relatively easy to transfer across the same organisation. However, real innovation may be lacking and best in class performance is more likely to be found through external benchmarking.
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Internal resources, capabilities and competences Chapter learning objectives Upon completion of this chapter you will be able to:
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define and describe strategic capability, threshold resources, threshold competences, unique resources and core competences
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explain why cost efficiency is important in all organisations
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explain, for a range of organisations, the importance of innovation in supporting business strategy
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explain the importance of knowledge management for both profit seeking and notforprofit organisations
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apply the SWOT model in a scenario
describe the capabilities needed to sustain competitive advantage
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1 Introduction This chapter looks at how organisations can develop and sustain competitive advantage through the use of resources and competences. It ends by looking at SWOT analysis, which brings together internal and external factors to allow organisations to assess their strategic position.
2 Strategic capabilities, resources and competences Capabilities
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Strategic capability is the adequacy and suitability of the resources and competences an organisation needs if it is to survive and prosper.
Note that capability refers to resources and competences and their relationship can be shown as:
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Strategic capability can also be divided into threshold capabilities and capabilities for competitive advantage.
•
•
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Threshold capabilities. These are the minimum capabilities needed for the organisation to be able to compete in a given market. They consist of threshold resources and threshold competences – the resources and competences needed to meet customers’ minimum requirements. Capabilities for competitive advantage. The capabilities that allow an organisation to beat its competitors. These capabilities must meet the needs and expectations of its customers. Unique capabilities are not enough – they must be valued by the customers.
Unique resources are those resources that create competitive advantage and that others cannot imitate or obtain. Examples of unique resources are: – brand –
situation, for example, near a source of raw material or a source of cheap labour
–
sunk costs. Competitors have to cover depreciation costs
–
right to use a patented process.
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Internal resources, capabilities and competences Note that if the unique resource is peoplebased, the people can move to competitors or start their own business.
•
Core competences are the activities, processes and methods through which an organisation uses its resources effectively,
in ways that others cannot imitate or obtain. Examples of core competences are: – sophisticated IT that, for example, enables complex and accurate demand forecasting –
a corporate culture that fosters innovation
–
the ability to share and lever knowledge throughout the organisation.
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Illustration 1 – Capabilities, resources and competences The CocaCola Corporation has, for many years, maintained a very strong position in the soft drinks market. Consider its flagship product, CocaCola. This has largely survived competition from supermarkets’ ownlabel colas. There is no great secret in how to make a reasonable imitation (though purists would maintain the imitations are not as good) and the resources needed are not demanding. The ownlabel colas sell at much lower prices, so highvolume production resources, capable of producing flavoured carbonated water do not seem to be important in keeping production prices down. So how has CocaCola managed to keep its dominant position? It has been argued above that physical resources do not seem to be important. Therefore, the answer must lie in nonphysical resources (such as a very powerful brand) and core competences. The core competences lie in managing the brand by producing memorable global advertising, global recognition, careful sponsorship, responding to customer requirements (diet/light products).
Test your understanding 1
Panasonic and Leica formed a joint venture to produce cameras under the trade name ‘Lumix’. How did this enable the companies to gain both threshold and capabilities for competitive advantage?
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Resources If an organisation does not have sufficient resources to carry out its plans to achieve longterm success and competetitive advantage, then it must either:
• •
make good the resource deficit change its operations and plans.
The main resources that any organisation has to consider are shown in the table below, together with some matters that should be considered about each. Also shown are some of the solutions that could be considered if the resource is inadequate. As a memory aid, note that many of the resources can be described by words beginning with ‘M’. Resource
Considerations
How to make good resource deficits
Money
Cash flow, safety margin, gearing, investment plans, dividends.
Management
Often a key resource issue in Hire good managers, small companies, especially training, take over family companies, planning to another organisation to expand. Family members are not acquire management guaranteed to have the required expertise, sell out to a skills and entrepreneurs often do larger company that can not like managing more mature impose good organisations. management.
Manpower (i.e. human resources)
Number of employees with the Recruitment, training, correct skills. Particularly an takeover,
sub issue in service industries where contracting. employees often have direct contact with customers and therefore the potential of doing instant harm to the organisation’s reputation is high.
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Issue shares, borrow, sale and leaseback, overdraft, instalment credit, factoring.
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Internal resources, capabilities and competences Manufacturing Quality, flexibility, volume, cost. Age of machinery.
New machinery, training, quality initiatives, IT systems, subcontracting, computer aided manufacturing, relocation of production facilities to a cheaplabour area.
Markets
Volume, location, product/service requirements.
Market growth, new market development, new product development.
Materials
Price, volume, quality, location.
Locate other suppliers, enter longterm supply contracts, takeover material producer, electronic data interchange for ordering goods.
Brand
Recognition, connotations, Advertising, rebranding, new tainting premium brands brand names,
takeover of a with cheaper products. strong brand.
IS/IT
IS/IT and the provision of detailed information for sales, manufacturing and customers is becoming vital to many organisations.
Write own system, buyin a package system, subcontract design and/or running the IS/IT system.
IS/IT can directly affect an organisation’s competences as information is often the tool used to deploy and organise resources effectively.
3 Cost efficiency Managing costs needs both resources and competences. For example, modern, flexible machinery can cut production time and costs; having the competence to organise an efficient justintime inventory system will save inventory costs. Cost efficiency can be thought of as a threshold strategic capability because:
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customers do not value product features at any price. If the cost is too high, no sales will be made
•
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• • • •
economies of scale experience (the learning curve) supply and production costs product/process design.
For many organisations, growth is therefore not an option as slower growth means falling behind competitors in both economies of scale and in experience. Note that many business sectors have experienced great consolidation as organisations are forced to merge to achieve cost efficiency. Note the shape of the learning curve:
There can be advantages in being an innovator as an organisation will be ahead of its rivals in the early years, but after some time, further cost efficiencies become harder to gain by experience and costs will tend to even out.
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Test your understanding 2
Consider how the following technologies could improve cost efficiency: (1) the internet (2) computeraided design (3) subcontracting (4) takeovers.
4 Sustaining competitive advantage The capabilities needed to sustain competitive advantage are.
•
Value of strategic capabilities. The strategic capability must be one that is of value to the customer. A distinctive capability is not enough: the strategic capability must be able to generate what customers value in terms of products or services.
•
Rarity of strategic capabilities. Competitive advantage will not be attained if competitors have identical strategic capabilities. Unique or rare resources or competences are needed to allow the organisation to outperform its rivals.
•
Robustness of strategic capabilities. Capabilities for competitive advantage should be robust, meaning that they are hard to imitate. Therefore, competitive advantage is not so often sustained through physical/tangible resources as these can be copied/acquired over time. More important is the way in which the resources are organised and deployed as these competences are, in general, more difficult to identify and imitate.
Illustration 2 – Sustaining competitive advantage Dyson vacuum cleaners have sold well for many years, at relatively high prices, in the face of competition from large, more established manufacturers such as Hoover and Philips. The sources of their sustained competitive advantage are. Value: innovative, bagless, hitech styled. Rarity: high amounts spent on research and development. Other manufacturers might have a vested interest in selling dust bags at high profit margins and are reluctant to innovate.
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chapter 4 Robustness: patented process to centrifuge dust into the collection container.
Test your understanding 3
In terms of margin per unit sold, Porsche is the world’s most successful car company. Suggest how that company might have achieved and sustained such a strong position.
5 The importance of innovation Innovation is increasingly seen as important for strategic success. The reasons are:
• • •
increased rate of technical advances increased competition increased customer expectations.
In all functions that serve to produce goods and services, achieving superior innovativeness, relative to that of competitors, can help the firm to acquire new customers. Superior innovation gives a company something unique, something that its competitors lack until they are able to imitate the innovation. By the time competitors succeed in imitating the innovator, the innovating company has already built up such brand loyalty that its imitating competitors will find it difficult to attack their position. Innovation can apply to:
• • •
the nature of the product or service being supplied how the product or service is produced and delivered operating the firm in a new or novel way.
A successful company is one that:
•
is outwardlooking, has accepted the reality of constant change and reviews its productmarket policy continuously
•
is always looking to the future towards new markets, innovative products, better designs, new processes, improved quality, increased productivity
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has a structure designed for innovation in which management and staff are stimulated to think and act innovatively, which recognises potential ‘intrapreneurs’ and ensures that everyone (particularly senior people) welcome changes for the better
•
stimulates creativity, and rewards ideas and supports individual and team abilities.
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Illustration 3 – The importance of innovation Amazon first appeared on the internet in 1995 selling books. It was a major innovator in the business of internet retailing and soon CDs and DVDs were added to its product lists. The website allows customers to search a very extensive database and to order goods, which would normally be delivered by post in a few days. The website also allows customers to write reviews about products, and informs customers about how consumers of a particular product also bought other products. Consumer goods such as electronics are now available from Amazon. Although Amazon is preeminent in internetbased sales of books, CDs and DVDs, innovation cannot stop and the company is spending heavily on technology that will allow customers to download books, music and video over the internet rather than having them delivered by post. The company is being forced to innovate because competitors, such as Apple’s iTunes, have been very successful in selling audio downloads, and have recently made movies available for downloading. Ondemand printing of books is particularly suitable for lowervolume books and those that would normally be regarded as out of print. Unless Amazon can provide downloadable material, it risks losing business to those who can – rather like a decade ago when Amazon itself attacked conventional book and music shops.
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6 Knowledge management What is knowledge? Before the importance of knowledge management is discussed, an attempt has to be made to define ‘knowledge’. This can only be done by comparing knowledge with data and information.
•
Data is raw fact. For example, a list in ascending order of all outstanding invoices is data.
•
Information is data that has meaning. For example, a list of all outstanding invoices sorted by customer and with subtotals calculated for each customer. Now the data has meaning and has become useful.
•
Knowledge is information in someone’s mind. A printout of the sales ledger contains information, but if it is never read by someone, it will never become knowledge and remains useless until it is read.
Knowledge is of two types.
•
Explicit knowledge. This is generally written down and organisations know that it exists.
•
Tacit knowledge. Not written, often existing only in employees’ minds. Organisations are unlikely to know that it exists, or the extent to which it exists.
Illustration 4 – Knowledge management Members of a sales team will have information available about the sales made to key customers and the sales trends of the company’s major products. This information and knowledge is explicit as it exists in reports that are widely distributed. A sales representative may have personal knowledge about the character, interests and background of the buyers in major customers. This helps the sales person get on with the buyers and this should help to generate sales. If the sales representative keeps this knowledge to himself, or herself, this would be an example of tacit knowledge and the organisation will not usually be aware of it. Indeed, the sales representative might not be actively aware about the importance of this knowledge and about how it is used in the sales process. Another sales representative has read an article in a scientific journal that implies that one of the company’s major products may have long term health implications for customers. However, that knowledge remains tacit unless passed on to others and formalised.
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Knowledge management Knowledge management involves the processes of:
• • • • • •
uncovering, or discovering, knowledge capturing knowledge sharing knowledge distributing knowledge levering knowledge maintaining knowledge.
Illustration 5 – Knowledge management Modern IT systems have made sharing and distributing knowledge easier. Corporate intranets will make available information on customers and products. Groupware, such as Lotus Notes, allows collaboration on documents and projects, customer relationship management systems provide quick access to important customer information and can provide customers with a much better service. The UK Government has a massive project in progress to computerise everyone’s health records. The aim is that a patient’s medical history will be available instantly to any health professional in any hospital or clinic.
The growing importance of knowledge management Knowledge management has become an important part of gaining and mantaining competitive advantage. Reasons for this are as follows.
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Both business and notforprofit organisations are more complex so there is more knowledge to manage. For example, there are many more government regulations that have to be followed for health and safety. The government sets many more targets to monitor the performance of hospitals and schools.
•
The environment, technology, competitors and markets are changing rapidly. Look at the pace of change in the broadcast/internet industry.
•
The move from manufacturing to service industries means that a greater proportion of an organisation’s knowledge is likely to be tacit. It is relatively easy to formally specify a product, but harder to specify everything that should happen in the successful delivery of a service.
•
Greater job mobility means that, unless captured and recorded, valuable knowledge can be lost as staff move on.
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Test your understanding 5
A barrier to knowledge management is that many people believe that keeping knowledge secret gives them unique power. Knowledge management, however, requires that knowledge is uncovered and shared. What arguments could be used to encourage individuals freely to give up and share knowledge?
7 SWOT analysis Strengths, weaknesses, opportunities and threats A SWOT analysis can be used as an analysis tool in its own right or can be used as a summary sheet on which other results can be placed.
•
Strengths and weaknesses relate to resources and capabilities: what is the organisation good at? What is it poor at? Where are resources in short supply? Where are resources excellent?
•
Opportunities and strengths relate to external factors: what will the effect on the organisation be of economic changes? Can the organisation make use of new technologies? Are new entrants likely to enter the market place? Can a powerful customer dictate terms?
The examination will feature scenarios detailing the history and current position of an organisation and possible future states. Candidates will probably have to analyse the organisation’s strategic position, i.e. to carry out a corporate appraisal. It is possible to arrive at a reasonable analysis merely by producing a SWOT analysis, but it is likely to be more productive and impressive to use one or more of the other analysis tools, such as PESTEL, to help generate ideas for the SWOT analysis.
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Using a SWOT analysis The first step is to rank in order of importance the findings of the SWOT analysis.
•
Strengths that match no opportunity are of little use without an opportunity.
•
A distinctive competence is a strength that can be exploited.
Strategies can be developed which:
• • •
neutralise weaknesses or convert them into strengths convert threats into opportunities match strengths with opportunities.
These are discussed in more detail in chapter 6.
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Test your understanding 6
What types of strengths, weaknesses, opportunities and threats would a ‘no frills’ airline have?
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8 Chapter summary This chapter has covered the following areas:
•
defined and described strategic capability, threshold resources, threshold competences, unique resources and core competences
• • •
explained why cost efficiency is important in all organisations
•
explained the importance of knowledge management for both profit seeking and notforprofit organisations
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described the use of SWOT analysis.
described the capabilities needed to sustain competitive advantage explained, for a range of organisations, the importance of innovation in supporting business strategy
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Test your understanding answers
Test your understanding 1 Leica was a very famous and prestigious conventional camera maker, esteemed for the quality of its lenses; it had no electronics capability. Panasonic has immense electronics design and production capability; it has (or had) no optical capability. Together the partners gained threshold capability in making high quality digital cameras – good lenses and good electronics. It’s not clear if the joint venture has generated capabilities for competitive advantage. Certainly both partners have strong, respected brand names, but other companies (such as Sony and Canon) are very strong in the digital camera market also. It has yet to be seen if Lumix will enjoy protection from competitors that will allow longterm competitive advantage.
Test your understanding 2 (1) The internet. The internet can be used for very costeffective marketing, distribution of information, support, sales ordering. (2) Computeraided design. CAD can reduce the cost and length of time it takes to design a new product, can help designing a product that is faster and cheaper to make and might increase the chance of using components shared by several products. (3) Subcontracting. It might be cheaper for an organisation to buyin goods or services from a specialist rather than supplying these itself. The specialist will have efficient largescale manufacturing plant of its own and its research and development expense can be divided over many units. Subcontracting gets rid of some of the fixed costs. Subcontracting can make use of manufacturing based in lowcost economies. (4) Takeovers. Consolidation within an industry can lead to economies of scale from greater buying power, R&D and marketing costs being spread over more units, faster progression along the learning curve.
Test your understanding 3 Value – many people value a wellstyled, prestigious, wellbuilt, high performance sports car.
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chapter 4 Rarity – Porsche is based in Germany, which has a very good reputation for autoengineering. Great history of success in motor racing, relatively rare skills in producing highquality performance cars. Robustness – a very strong, iconic brand; a history of famous owners including Steve McQueen, Janis Joplin, James Dean (who was killed driving one).
Test your understanding 4 Note, you might have suggested other valid areas for innovation. (1) Innovation is very important in the car industry and car manufacturers launch new models periodically. Sometimes, the innovation is limited mainly to style, but sometimes it is more fundamental. For example, petrol/electric hybrid cars such as the Toyota Prius have received very favourable publicity. Innovation has long been important in safety, for example the development of ABS braking and airbags. With increasing oil prices, fuel economy is becoming very important. New materials offer better strengthtoweight ratios and new engine design offers lower fuel consumption and less pollution. Improved design of components and automation of the production line can make production faster and cheaper. (2) Supermarkets can carry out both product innovation and process innovation. For example, many supermarkets developed and stock a wide range of ovenready meals, which are a relatively new phenomenon. Genetically modified foods would, in theory, present great opportunities for new products, but there is considerable consumer resistance to this technology. Process innovation has concentrated in supply chain management, data warehousing and data mining. Many supermarkets now carry no backroom inventories and expect their suppliers to make deliveries several times a day. Some supermarkets give suppliers access to the supermarket’s inventory records and shift the onus of supplying goods at the right time onto the supplier, rather than the supermarket issuing purchase orders. In data warehousing an organisation keeps vast quantities of historical data, for example, about customers’ purchases. Purchases are related to specific customers when the customer uses his or her loyalty card. This data can be ‘mined’ to discover associations, patterns and trends. This information can be used for demand forecasting and for addressing very tailored marketing to customers.
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Internal resources, capabilities and competences Many supermarkets have launched internet shopping services and deliver the goods to the customer. Supermarkets are currently investigating ways in which checkouts can be made more efficient and faster. (3) Commercial television companies are all feeling commercial pressure from the internet, because the internet allows very targeted advertising that is very attractive to marketing departments. In Google, for example, sponsored links are paid for by the advertiser only if the user clicks on the link. Obviously, TV companies are always on the lookout to innovate by launching new programme formats and gripping series. However, this does not seem to be enough to stop the shift from TV to online services. Highdefinition television will attract viewers back for some programmes; interactive digital television might have had the same effect. However, commercial television might have to innovate more radically. For example, why are cable viewers of a new series typically allowed to watch only one episode per week? Why are episodes rationed out at the TV company’s convenience? Why aren’t viewers allowed to watch all episodes at one sitting (as one might do with a DVD)? Perhaps commercial TV will have to become more like an online service where the consumer has greater choice of what to download and when.
Test your understanding 5 The following arguments could be used to encourage individuals to share knowledge.
•
•
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If everyone shares their knowledge, each person should gain more than they give up.
Organisations are often so complex that it is rare that one person can achieve much alone. Teamwork and sharing knowledge is the best way of assuring a safe future.
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•
Knowledge is perishable – and increasingly so as the pace of change increases. If knowledge is not used quickly it is wasted. If knowledge is not shared the chances are that it becomes worthless before it can be used.
•
Knowledge management is vital to the success of many businesses. If an organisation uses knowledge creatively the chances are that it will beat an organisation with poor knowledge management. Organisations compete with rivals; people within organisations should not be competing with each other at the organisation’s expense.
Test your understanding 6 Strengths
Weaknesses
•
Airports used are better than • those used by competitors
Airports used are worse than those used by the big carriers
• •
Management skills
• Lower costs than established • airlines • Ease of booking flights •
Punctuality
• • • •
Recognised logo
Cash flows No established safety record Poorerthanaverage customer service
IT facilities Good employee relations
Opportunities
Threats
•
Strong business demand for cheap air fares
•
Strong leisure demand for cheap air fares
• • •
• •
The internet
Higher airport charges Stringent security checks Entry of subsidiaries of big carriers
Many secondary airports underused
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Stakeholders, ethics and culture Chapter learning objectives Upon completion of this chapter you will be able to:
•
analyse the implications of corporate governance for a given organisation with respect to its purpose and strategy
•
evaluate, in a scenario, stakeholder influence using stakeholder mapping
•
analyse the ethical influences on an organisation with respect to its purpose and strategy
•
explain the cases for and against businesses pursuing Corporate Social Responsibility (CSR)
•
evaluate the impact of culture on a given organisation’s purpose and strategy
•
analyse an organisation’s cultural web (symbols, stories, rituals, control systems, structure, power)
•
explain the importance for an organisation of communicating core values and mission.
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1 Introduction This chapter looks at corporate governance, business ethics, the influence and expectations of stakeholders, CSR and corporate culture – which can have a strong influence on ethics.
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2 Corporate governance Introduction Corporate governance is about the way in which organisations are run and who should control them – the chairman, the chief executive, and the board of directors, shareholders or other stakeholders such as employees.
Johnson, Scholes and Whittington suggest that a governance framework determines:
• •
whom the organisation is there to serve, and how the purposes and priorities of the organisation should be decided.
The need for corporate governance The need for corporate governance arises because in all but the smallest organisations there is a separation between:
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• •
ownership, and management control.
Typically there is a governance chain, which could be:
The principalagent model is useful in explaining how the system should work: agents should work on behalf of their principals. However.
•
The gap between ultimate beneficiaries and those making daytoday decisions can be large and agents might not know what the beneficiaries want.
•
Selfinterest can cause agents to work for their own benefit at the expense of their principals (remuneration packages, share options, budget padding, shorttermism to make current results look good at the expense of longterm performance).
Laws and principles have been developed to enhance corporate governance. These include:
•
company law – for example, giving shareholders the right to dismiss directors and auditors
• • •
the audit function – an independent review of the accounts accounting standards – increased and more uniform disclosure various codes on corporate governance. For example, all companies quoted on the London Stock Exchange are expected to comply with the Combined Code of Corporate Governance (though not forced to). If a company does not comply it must explain why.
Typical features of codes, such as the Combined Code include:
•
boards should have nonexecutive directors – to advise and warn the executive directors. Executive and nonexecutive directors (NEDs) should be in balance so that neither group dominates
•
there should be a separation of the roles of chairman and chief executive
•
executive remuneration should be decided by a remuneration committee, consisting of nonexecutive directors
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an audit committee, comprising nonexecutive directors should look after the appointment of supervision of auditors.
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Nonexecutive directors NEDs play an important role in corporate governance. These directors have no managerial responsibility, but they are full board members and therefore have access to and can influence the highest level of corporate decision making. Their functions include.
• •
Bringing additional experience and knowledge to the board.
•
Providing confidence to other parties as NEDs can provide independent, highlevel supervision. For example, NEDs are not allowed to have share options in a company so their remuneration is independent of company performance.
• • •
Determining executive remuneration (as mentioned earlier).
Warning executive directors about highrisk areas, ethical problems or inappropriate behaviour.
Appointing and liaising with auditors. Providing confidential advice to both the board and individual directors.
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Test your understanding 1
Consider the following (fictitious) extract from the published accounts of a quoted company: ‘The Board comprised the Chairman, Deputy Chairman, Chief Executive, two executive directors and six nonexecutive directors, who are collectively responsible for the success of the Company. Composition of the committees is as follows: audit – five nonexecutive directors; remuneration – five nonexecutive directors; and nomination – the Chairman and seven nonexecutive directors. At least half the Board, excluding the Chairman, comprises independent nonexecutive directors.’
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chapter 5 (1) Who should be appointed to balance the board? (2) According to Johnson, Scholes and Whittington, what should a corporate governance framework be concerned with?
The implications of governance for strategy The results of the increasing focus on governance issues are as follows:
• •
Increasing power of governance bodies
•
Greater pressure on boards to formulate strategy and be seen to control the businesses concerned.
• •
Greater scrutiny of quoted businesses, resulting in more shorttermism
•
Greater scrutiny of mergers and acquisitions in particular.
Increasing shareholder power, ensuring that companies are run with shareholders’ interests prioritised.
Greater emphasis on risk assessments, so directors may feel pressured to undertake lower risk (and hence lower return) projects
3 Stakeholders Introduction
A stakeholder of an organisation is anyone affected by the organisation.
The following are the general characteristics of stakeholders.
• •
Any organisation has many different interested parties or stakeholders.
• •
Their objectives may well be in conflict.
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This has implications for corporate governance where Johnson, Scholes and Whittington suggest that a governance framework determines whom the organisation is there to serve and how the purposes and priorities of the organisation should be decided.
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It is a function of management to satisfactorily and ethically resolve conflicting demands.
Often, each will have different objectives and degrees of influence or power. Note that just because a stakeholder has power does not mean that there is a right to exercise that power.
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Stakeholder mapping Stakeholder mapping can help deal with stakeholders’ conflicting demands. It identifies stakeholder expectations and power and helps in establishing political priorities. The process involves making decisions on the following two issues.
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How interested the stakeholder is to impress their expectations on the organisation’s choice of strategies, i.e. how likely is the stakeholder to exercise power?
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To what extent the stakeholder has power to impose its wants?
How interested are they? Not all stakeholders have the time or inclination to follow management’s decisions closely. Again some generalisations are possible about what will lead to interest, e.g.:
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high personal financial or career investment in what the business does
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potential to be called to account for failing to monitor (e.g. local councils or government bodies such as regulators)
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high social impact of firm (e.g. well known, visible product association with particular issues).
absence of alternative (e.g. alternative job, customer, supplier or employer)
Power Resignation, withdrawing labour, cancelling orders, refusing to sell, calling in an overdraft, dismissing directors, legal action, granting contracts, setting remuneration. Note than legislation tends to move power away from shareholders to other stakeholders.
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Employee protection legislation (dismissal, redundancy, health and safety) moves power to employees and away from management and shareholders.
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Environmental protection legislation moves power to the local community and other interested parties.
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Consumer legislation moves power to customers.
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Mendelow proposed a matrix to help analyse stakeholders.
Note that ‘level of interest’ can usefully be described as how likely it is that a stakeholder will take some sort of action to exercise his or her power. The matrix is normally completed with regard to the stakeholder impact of a particular strategy. The purpose is to assess:
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whether stakeholder resistance is likely to inhibit the success of the strategy
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what policies may ease the acceptance of the strategy?
The following strategies might be applicable to each quadrant: Box A – Minimum effort Their lack of interest and power makes them open to influence. They are more likely than others to accept what they are told and follow instructions. Box B – Keep informed These stakeholders are interested in the strategy but lack the power to do anything. Management needs to convince opponents to the strategy that the plans are justified; otherwise they will try to gain power by joining with parties in boxes C and D. Box C – Keep satisfied The key here is to keep these stakeholders satisfied to avoid them gaining interest and moving to box D. This could involve reassuring them of the outcomes of the strategy well in advance.
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Box D – Key players/participation These stakeholders are the major drivers of change and could stop management plans if not satisfied. Management, therefore, needs to communicate plans to them and then discuss implementation issues.
Test your understanding 2
Where should the following probably be mapped on the Mendelow matrix? (1) Nurses in a hospital (2) An airline’s checkin staff (3) Smallvalue customers
4 Ethics Introduction
Business ethics is the application of ethical values to business behaviour.
Ethical issues concerning business exist at three levels.
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Macro level – the role of business at national and international level and concerned with assessing the relative virtues of different political/social systems, e.g. centrally planned economies and free enterprise.
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Corporate level – focuses on the ethical issues facing individual companies when formulating and implementing strategies.
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Individual level – concerns the behaviour and actions of individuals within the organisation.
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Ethical stances Johnson, Scholes and Whittington define ethical stance as:
‘The extent to which an organisation will exceed its minimum obligations to stakeholders.’
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There are four possible ethical stances:
Shortterm shareholder interest (STSI) This ethical stance has a shortterm focus in that it aims to maximise profits in the financial year. Organisations with this ethical stance believe that it is the role of governments to set the legal minimum standard, and anything delivered above this would be to the detriment of their taxpayers. Longerterm shareholder interest (LTSI) This ethical stance takes broadly the same approach as the shortterm shareholder interest except that it takes a longerterm view. Hence it may be appropriate to incur additional cost now so as to achieve higher returns in the future. An example could be a public service donating some funds to a charity in the belief that it will save the taxpayer the costs associated with providing the entire service should the charity cease to work. Hence this ethical stance is aware of other stakeholders and their impact on longterm profit or cost. Multiple stakeholder obligation (MSO) This ethical stance accepts that the organisation exists for more than simply making a profit, or providing services at a minimal cost to taxpayers. It takes the view that all organisations have a role to play in society and so they must take account of all the stakeholders’ interests. Hence they explicitly involve other stakeholders, and believe that they have a purpose beyond the financial. Shaper of society This ethical stance is ideologically driven and sees its vision as being the focus for all its actions. Financial and other stakeholders’ interests are secondary to the overriding purpose of the organisation.
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Benefits of an organisation being ethical Apart from an ethical organisation being, perhaps, ‘morally correct’, there are more quantifiable business benefits:
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lower risk that, for example, should create more stable earnings and should make cheaper finance available
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attractive to customers
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less spent on paying damages and fines.
attractive to potential employees attractive to potential collaborators and partners less time and cost spent dealing with investigations by regulatory bodies
Illustration 1 – Ethics 2004 On 30 September 2004, the share price of US drug company Merck fell to an eightyear low after it was forced to withdraw a painkiller Vioxx, used by many arthritis sufferers, due to side effect fears. Merck’s share price fell 26.8% after it removed the Vioxx product from all markets due to an increased risk of heart attack and stroke. The announcement was immediately followed by a US lawsuit claiming the firm misled users. One of the legal firms that has filed the suit, said Merck had failed to warn that the drug was defective. However, other analysts said Merck had acted as promptly as possible. 2005 A Texas jury found Merck & Co. responsible for the death of a 59year old triathlete who was taking the company’s oncepopular painkiller, Vioxx. The jury hearing the first Vioxx case to go to trial awarded the man’s widow $253.4 million in punitive and compensatory damages – a harsh reprimand to an industry leader that enjoyed a generally favourable public image before the Vioxx problem began.
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Comment Investors in pharmaceutical companies know that there is always the risk of longterm side effects coming to light and this is factored into their risk and reward perspective. The huge fall in the share price was caused by the suspicion at the time that Merck had evidence about the side effects but suppressed that information. There was damage, justified or not, to both the company’s share price and to its reputation. Real costs of suspected unethical behaviour.
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Test your understanding 3
How would you apply ethical considerations to the following dilemmas? (1) A rival company creates the legally permitted maximum of toxic waste. Your company has a range of expensive systems that keep waste to much lower levels. Not using these would reduce costs, and there is increasing pressure from industry analysts to increase the return on investment. (2) A young, talented and ambitious team leader wants you to dismiss a member of his team, who is much older than the rest and does not really fit in. However, the worker in question has worked at the company a long time with a good record of service. (3) You are forced to make redundancies in a department. The Human Resources manager has said, off the record, that it must not seem that gender or ethnicity is an issue, so you must make it look fair. However, this would require you to keep some weaker individuals, and lose some good ones.
5 Corporate social responsibility Introduction
Corporate responsibility is concerned with the ways in which an organisation exceeds the minimum obligations to stakeholders specified through regulation and corporate governance.
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Although there might be differences of opinion about what is and is not ethical, few people would argue that business ethics, for example honesty, are voluntary. However, the case for corporate social responsibility is not so clear cut, and there are a number of different views relating to social responsibility.
The different views The shareholder view Friedman argues that, ‘the social responsibility of business is to make a profit’. The justifications for this are:
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pursuing profit will result in increased employment, generate economic growth, stimulate innovation, increase the tax take and generally raise living standards. Making profits is therefore itself a public good and is a sufficient purpose of business
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directors should be acting on behalf of the shareholders. CSR too often means that directors are being charitable with other people’s money
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shareholders are free to use their dividends to contribute towards CSR if they wish
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business is not competent to decide moral and ethical matters. Where is the democratic connection between what a business decides to spend money and effort on and where that money and effort are actually needed or wanted by society? Are CSR projects chosen simply because they are areas where directors, or their spouses, are personally interested.
The longerterm selfinterest view Drucker argues that it is in the longterm economic selfinterest of business to act in a reasonably responsible manner.
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Failure to do so will prompt legislation. Failure to do so will damage the business and even the industry. The public relations and enhancement of reputation arising from CSR will increase profits in the long term. CSR is therefore seen and justified as expenditure that helps to generate long term profits.
The stakeholder view This view assumes that shareholders are simply one stakeholder among many, and that their interests are not necessarily paramount. There may be circumstances where shareholder interest has to be sacrificed for the greater good of other stakeholders.
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chapter 5 Quite how it is decided which stakeholders deserve generosity at any particular time is not clear. There is a danger that the stakeholders that benefit are those with most power – which is not necessarily the same as the stakeholders who might deserve attention.
Common areas for CSR issues The following are common areas where businesses get involved in CSR issues:
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work creation and training programmes sponsorship of the arts and sport employee welfare programmes community welfare programmes support for educational institutions and links with business contributions to overseas aid environmental programmes.
Illustration 2 – Corporate social responsibility The Marks & Spencer Group Plc sets CSR targets in the following areas: Products
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Extending the use of the Supplier Ethical Data Exchange (SEDEX) database that allows retailers and manufacturers to share the results of labour standard audits at suppliers they have in common.
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The removal of hydrogenated fats and oils from food. Further reduce the use of salt, added sugar and additives. Continue to reduce the environmental impact of packaging. Develop further ranges based on Organic, Fairtrade, Marine Stewardship Council or Forest Stewardship Council certification.
People Providing employees with the skills they need to source products efficiently and provide great customer service. Extend free, fast referral to physiotherapists, osteopaths and chiropractors, and access to confidential telephone advice and counselling to help employees with physical and mental health problems that affect their performance at work.
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Places Work towards low carbon ‘footprint’ stores by reducing store energy carbon emissions further upgrade delivery fleets to less polluting Euro IV engine standards.
Illustration 3 – Corporate social responsibility BP BP, primarily known as an oil company, launched its ‘Beyond Petroleum’ initiative in the early 2000s to address climate change. In 2005, it announced plans to invest $8 billion over the next 10 years in renewable energy. It is already the second largest solarpower producer in the world. However, two recent incidents have damaged BP’s image for promoting CSR. Firstly there was an explosion at its Texas City refinery in which 15 people were killed and over 150 injured. Secondly, there was a serious oil leak from its pipeline at Prudhoe Bay, in Alaska. There are accusations that lack of investment in safety, training and inspection were responsible for both incidents. Critics of BP have accused it of ‘greenwash’, i.e. using environmentally friendly programmes to divert attention from less benign activities.
Test your understanding 4
How could a supermarket company respond to the following concerns from stakeholders or interest groups? (1) Use of plastics in product packaging. (2) Concerns about animal welfare. (3) Healthy eating.
6 Organisational culture Introduction
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Culture is the set of values, guiding beliefs, understandings and ways of thinking that are shared by the members of an organisation and is taught to new members as correct. It represents the unwritten, feeling part of the organisation.
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Culture is ‘the way we do things around here’ (Charles Handy). Culture is a set of ‘takenforgranted’ assumptions, views of the environment, behaviours and routines (Schein).
The effect of culture Culture, as a set of takenforgranted assumptions, will affect:
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strategy – what should the company do? What can it do?
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perceptions about competitors
approach to strategic planning. Strategy as design, experience and ideas perceptions about customers management style attitude to various stakeholders ethical behaviour attitudes towards CSR.
The cultural web This model of cultural behaviour was devised by Gerry Johnson as part of his work to attempt to explain why firms often fail to adjust to environmental change as quickly as they needed to. He concluded that firms developed a way of understanding their organisation – called a paradigm – and found it difficult to think and act outside this paradigm if it were particularly strong. A paradigm in this case is a shared mindset – formed from the basic or implicit assumptions that members of an organisation unconsciously carry around with them. The cultural web is concerned with the manifestations of culture in the organisation and has six interrelated elements.
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Routines and rituals – routines are ‘the way things are done around here’ and may even demonstrate a beneficial competency. Rituals signal that something is especially valued. They include events such as award ceremonies for bestperforming salesperson.
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Stories and myths – these are told by members of an organisation. They embed the present in its organisational history and demonstrate important events and personalities, as well as mavericks that deviate from the norm.
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Symbols – such as logos, offices, cars, titles, type of language and terminology commonly used become a shorthand representation of the nature of the organisation.
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Power structure – the dominant coalition is the obvious source of power in an organisation. This may be based on management position and seniority but in some organisations power can be lodged with other levels or functions.
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Organisational structure – reflects the formal and informal ways in which the organisation works. Structures are likely to reflect power.
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Control systems – the measurement and reward systems that emphasise what is important to monitor and to focus attention and activity upon.
The concept of the cultural web is a useful device for mapping out change but its real worth is in the fact that we can identify which elements of culture need to change.
Test your understanding 5
Put the cultural elements of the National Health Service into a cultural web. 100
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7 Core values and mission Introduction To establish the primary reason for an organisation’s existence and to define core values many organisations formulate mission statements.
Johnson, Scholes and Whittington refer to an organisation’s mission as ‘the most generalised type of objective (that) can be thought of as an expression of its raison d’être’.
Core values are the principles that guide an organisation’s behaviour. The mission indicates to both the world at large and to those making the strategic decisions, the broad ground rules that the organisation will adhere to when conducting its business.
Contents of a mission statement A mission statement should contain the following:
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purpose strategy policies and Standards of Behaviour values.
Also:
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mission statements should be short – typically half a page note that mission statements can have a valuable role in setting ethical standards and organisational culture.
Purpose Why is the company in business? What is the organisation for? Some organisations and companies do not attempt to reach a conclusion about the nature of their overall purpose. However, where companies do have an idea of their purpose, research by Campbell, Devine and Young shows that the companies fall into the following types.
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Companies that just exist for the benefit of the shareholders. Their main purpose is to maximise shareholder wealth and all decisions are assessed against a benchmark of shareholder value.
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Companies that believe that the satisfaction of shareholders is not the only reason for existence and believe it to be important to satisfy all stakeholders. In their mission they address how they are to satisfy the needs of customers, the community, the employees as well as the shareholders.
Strategy This component of the mission statement then addresses how it is going to achieve its purpose. This could involve a statement of industrial domain (where to compete) and the nature of competitive advantage sought. Policies and standards of behaviour Without policy and behaviour guidelines that help staff to make decisions on a daytoday basis the strategy and purpose has little value. Values Values are the feelings and moral principle that lie behind the company’s culture.
Advantages and disadvantages of mission statements The claimed advantages:
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help resolve stakeholder conflict set the direction of the organisation and so help formulate strategy help communicate values and culture to employees help the marketing process by communicating with customers.
The criticisms of mission statements:
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often full of meaningless terms like ‘the best’, which give staff little idea of what to aim at
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often written retrospectively to justify past actions often ignored by managers might simply be a public relations exercise.
Illustration 4 – Core values and mission Below is the philosophy or mission of Nissan Motors (UK) (NMUK). As a company we aim to build profitably the highest quality car sold in Europe. We want to achieve the maximum possible customer satisfaction and ensure the prosperity of the company and its staff.
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chapter 5 To assist in this we aim to achieve mutual trust and cooperation between all people within the company and make NMUK a place where longterm job satisfaction can be achieved. We recognise that people are our most valued resource and in line with this spirit believe that the following principles will be of value to all. People We will develop and expand the contribution of all staff by strongly emphasising training and the expansion of everyone’s capabilities. We seek to delegate and involve each staff member in discussion and decisionmaking, particularly in those areas in which each of us can contribute effectively so that all may participate in the efficient running of NMUK. Teamworking We recognise that all staff have a valued contribution to make as individuals but in addition believe that this contribution can be most effective within a teamworking environment. Our aim is to build a company with which people can identify and to which we all feel commitment. Communication Within the bounds of commercial confidentiality we will encourage open channels of communication. We would like everyone to know what is happening in our company, how we are performing and what we plan. We want information and views to flow freely upward, downward and across our company. Objectives We will agree clear and achievable objectives and provide meaningful feedback on performance. Flexibility We will not be restricted by the existing way of doing things. We will continuously seek improvements in all our actions. These are tough targets and we aim high. With hard work and goodwill we can get there.
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Test your understanding 6
Consider the usefulness, or otherwise, of the following mission statements: (1) Courses for careers, research for results. (A university) (2) To be a pioneer in graphite communications. (A manufacturer of lead pencils) (3) To be excellent in our chosen field, and provide the best in customer service and quality that resources permit. (4) Kill Caterpillar. (Komatsu)
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8 Chapter summary This chapter has covered the following areas:
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examined the meaning and importance of corporate governance
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explained the cases for and against businesses pursuing CSR
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analysed an organisation’s cultural web (symbols, stories, rituals, control systems, structure, power)
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explained the importance for an organisation of communicating core values and mission.
analysed the ethical influences on an organisation with respect to its purpose and strategy evaluated the impact of culture on a given organisation’s purpose and strategy
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Test your understanding answers
Test your understanding 1 (1) Independent nonexecutive directors. (2) Johnson, Scholes and Whittington suggest that a governance framework determines: – whom the organisation is there to serve, and –
how the purposes and priorities of the organisation should be decided.
Test your understanding 2
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chapter 5 (1) Theoretically, nurses have a lot of power. If they withdrew labour, a hospital would soon have to stop admitting and treating patients. However, the ethical, professional and humanitarian standards of nurses means that industrial action is extremely rare. (2) Airline staff have, in the past been very willing to take industrial action, which quickly cripples the airline. (3) If a smallvalue customer feels aggrieved, he or she can usually easily take their business to another supplier. However, this is likely to have little effect on the supplier. Only if many small customers banded together would they achieve power.
Test your understanding 3 In all these examples, the dilemma cannot be resolved, but much can be done to defend the values that are creating the problem in the first place. For example, there may be some competitive advantage in asserting the cleanliness of the product, or supporting an older worker’s experience that might be interpreted as dissent by a younger worker. Making redundancies based on the image of fairness, rather than rewarding ability and application, is poor business. The answers are often legitimately found in steering between the two extremes of the dilemma.
Test your understanding 4 (1) Establish a programme of research and set targets for replacing plastic packaging with biodegradable packaging, such as cardboard. Promotion of the recycling of packaging. (2) Establish an annual programme of animal welfare projects. These will include supporting the improvement of welfare standards and specifications for both food and nonfood animal products. Institute inspections of suppliers’ premises by independent animal welfare organisations. (3) Complete the removal of potentially harmful hydrogenated fats and oils from virtually all food sold by the end of 2006. Incorporate key elements of the Food Standard Agency’s traffic light labelling scheme alongside the inhouse labelling. Continue to reduce the use of salt, added sugar and additives in food sold (Adapted from Marks & Spencer Group Plc’s Report on Corporate Social Responsibility).
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Test your understanding 5 Stories– in the NHS stories and myths cover the following: cures, villains (politicians), heroes and heroism, change agents are fools, abuse of managers and the golden age. Symbols – include terminology, white coats/uniforms, retinues, bleepers, doctors’ dining rooms and big institutions. Routines and rituals include clinical rituals, consultation ceremonies, blaming the next tier and treating patients like children – waiting rooms, putting to bed, waking up and ward rounds. Structure – is seen as hierarchical, mechanistic, tribal/functional and with a pecking order of services. Political systems – include professional bodies, the ‘old boy’ network, and politicians. Control – is through waiting lists, financial reporting and responsibility. The paradigm – covers issues such as:
• • • • •
the NHS is a public service – it is ‘ours’ and a ‘good thing’ it is free at the point of delivery providers know best it has superior acute sector clinicians’ values
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Test your understanding 6 (1) This is the mission statement of a British University. It identifies that the range of courses offered will be restricted to those that lead to an obvious career path, and research will be developed in partnership with those who have a commercial interest in discovery, rather than simply a sense of curiosity. As you might expect, this is a University with great ambition but relative few resources, which therefore focuses its activity into areas where it may compete effectively against its more august rivals. Note that the mission statement here implicitly describes both the customers it seeks and the services it wishes to offer. (2) This is the mission statement of a manufacturer of lead pencils. The important point is that it suggests innovation in a field more usually noted for costbased competition. Part of the company’s business is providing jokey, amusing slogans on its pencils, and the mission statement was chosen to reflect this. Note that this mission is directed at the customers; any message for employees is rather too subtle to operate effectively. (3) It has been argued that any mission statement containing the word ‘excellent’ should not be taken seriously – who wouldn’t want to be ‘excellent’, even at providing cheap goods. Excellence subject to resource constraints also appears rather qualified. However, this particular firm embarked on a rapacious programme of takeovers in a field where this was comparatively unknown. The resource base expanded, but very little of these extra resources found their way into product quality and customer service, leading to great cynicism from staff. (4) The final statement is a translation of the mission of Komatsu, who set their sight on taking Caterpillar’s domination of the tracked vehicle market. They picked out the weaker points of their rival’s operation, its softest markets and poorest products, and spent two decades building up the competences and driving them out.
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Strategic choice I Chapter learning objectives Upon completion of this chapter you will be able to:
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describe, for a range of businesses, the relationship between corporate parents and business units and how the corporate parent can create or destroy value
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explain in the context of a business, three corporate rationales for adding value – portfolio managers, synergy managers and parental developers
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evaluate, in a scenario, the use of a BCG matrix
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evaluate, in a scenario, the directional policy matrix
evaluate, in a scenario, the public sector portfolio matrix evaluate, in a scenario, the market attractiveness/SBU strength matrix evaluate, in a scenario, the Ashridge Portfolio Display
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1 Introduction The next two chapters look at the strategic choices available to an organisation. The emphasis in this chapter is the influence of corporate strategy on an organisation, focussing first on corporate parenting and then on portfolio analysis.
2 Corporate parenting Corporate parenting looks at the relationship between head office and individual business units Goold and Campbell Goold and Campbell (1991) identified three broad approaches or ‘parenting’ styles reflecting the degree to which staff at corporate headquarters become involved in the process of business strategy development. The approach will have a significant impact on the role of central departments such as the accounting function. The different styles are:
• • •
strategic planning financial control strategic control.
Strategic planning companies In strategic planning companies such as Cadbury Schweppes and BP.
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Corporate management play a major role in setting the strategies for each of the SBUs.
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The approach is based on the belief that strategic decisions occur relatively infrequently and that when they do, it is important for corporate headquarters to frame and control the strategic planning and decision making process.
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There is good integration across the units, which is particularly useful when resources such as distribution may be shared.
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Decisions are made at a senior level and hence there is less likelihood of shortterm views predominating.
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There may be a number of disadvantages: – difficulties in communication and coordination may slow down development –
there may be less ‘ownership’ of the strategies by the operating unit managers. There is strong empirical evidence that there are fewer lowrisk strategies pursued, which might otherwise be the case if strategy was centred on the unit managers
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there is also a likelihood that this strategy formulation from the centre might result in getting ‘locked into’ failing businesses. There may be a resistance to the closing down of poorly performing units if the strategies have been sanctioned at the centre.
Financial control companies In financial control companies such as Marconi (GEC).
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Timescales tend to be shorter.
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Failure to meet financial targets will lead to the possibility of divestment.
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Empirical evidence suggests that lower risk strategies are pursued but with resultant higher profitability ratios.
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Much of the growth in this scenario comes from acquisition as distinct from internal growth.
The head office takes a ‘handsoff’ approach but sets stringent short term financial targets that have to be met to ensure continued funding of capital investment plans. This type of strategy allows for diversity and companies generally have a wide corporate portfolio with limited links between divisions and acquisition/divestment is a continuing process as opposed to an exceptional event.
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There may be a number of disadvantages: – there is a propensity to be risk averse and possibly to ‘milk’ the business –
this type of decentralisation may make it difficult to exploit any potential synergies
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the control framework set up by the head office might constrain flexibility.
Strategic control companies In strategic control companies such as ICI.
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Corporate management take a middle course, accepting that subsidiaries must develop and be responsible for their own strategies, while being able to draw on headquarters’ expertise.
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Evaluation of performance extends beyond shortterm financial targets to embrace strategic objectives such as growth in market share and technology development, that are seen to support longterm financial and operational effectiveness.
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Diversity is coped with more readily than the ‘strategic planning’ style. There is also a danger of greater ambiguity.
Test your understanding 1
Comment on the implications of each of Goold and Campbell's approaches for innovation.
3 Adding value Corporate parenting Corporate parents do not generally have direct contact with customers or suppliers but instead their main function is to manage the business units within the organisation. The issue for corporate parents whether they:
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add value to the organisation and give business units advantages that they would not otherwise have
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add cost and so destroy the value that the business units have created.
Illustration 1 – Managing business units Kingfisher Group An example of a corporate parent and ‘child’ is the Kingfisher Group and B&Q.
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Ways of adding value There are a number of ways in which the corporate parent can add value.
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By providing resources which the business units would not otherwise have access to, such as investment and expertise in different markets.
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By providing access to central services such as information technology and human resources that can be made available more cheaply on an organisationwide basis due to economies of scale.
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By providing access to markets, suppliers and sources of finance that would not be available to individual units.
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By improving performance through monitoring performance against targets and taking corrective action.
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Sharing expertise, knowledge and training across business units.
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By helping business units to develop either through assisting with specific strategic developments or by enhancing the management expertise.
Facilitating cooperation and collaboration between business units. Providing strategic direction to the business and clarity of purpose to business units and external stakeholders such as shareholders.
Illustration 2 – Managing business units The rationale behind many takeovers is that they allow access to investment and expertise in different markets, e.g. the parent company may have the funds needed to finance high levels of research in high tech areas.
Destroying value It is not uncommon for corporate parents to be criticised for destroying value such that business units would fare better on their own. There are a number of ways in which this can happen.
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The high administrative cost of the centre may exceed the benefits provided to business units.
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The added bureaucracy resulting from the organisational structure may slow decision making and limit the organisation’s flexibility and speed of response to customers and environmental changes.
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If organisations become very complex, this can prevent clarity and make it difficult for managers within the organisation and external stakeholders to understand the strategic direction.
Test your understanding 2
What may be the result if a corporate parent does destroy value?
Rationales for adding value A wellmanaged corporate parent should be able to add value. In their book, Exploring Corporate Strategy, Johnson, Scholes and Whittington identify three corporate rationales or roles adopted by parents in order to do this:
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portfolio managers synergy managers parental developers.
The portfolio manager Portfolio managers:
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are corporate parents effectively acting as agents for financial markets and shareholders to enhance the value from individual businesses more effectively than the financial markets could
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identify and acquire undervalued businesses and improve them, perhaps by divesting lowperformance businesses or improving the performance of others
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keep the costs of the centre low by minimising the provision of central services and allowing business units autonomy with using target and incentives to encourage high performance
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may manage a large number of businesses, which may be unrelated.
The synergy manager Synergy managers:
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enhance value by sharing resources and activity, such as distribution systems offices or brand names
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may however bring substantial costs as managing integration across businesses can be expensive
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may have difficulty in bringing synergy as cultures and systems in different business units may not be compatible
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may need to be very handson and intervene at the business unit level to ensure that synergy is actually achieved.
The parental developer Parental developers:
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use their own central competences to add value to the businesses by applying specific skills required by business units for a particular purpose, such as financial management or research and development
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need to have a clear understanding of the valueadding capabilities of the parent and the needs of the business units in order to identify how these can be used to add value to business units
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need to ensure that they are able to add value to all businesses or be prepared to divest those to which they can offer no advantages.
Illustration 3 – Managing business units The Hanson Group made a number of large acquisitions of both related and unrelated businesses – in the diversified parts theysold off the parts that did not fit their expertise, e.g. the hightechnology, highgrowth businesses.
Test your understanding 3
Philip Morris used strong generation of cash from its cigarette sales to purchase a largescale food business. The management believed they had good expertise in developing strong global brand management and they could apply this to their acquisitions. What would be their corporate rationale for adding value?
4 Portfolio analysis tools The use of portfolio analysis Many companies have a portfolio of products or services with different characteristics such as market growth, investment requirements, projected profitability and the volume of the product’s sales.
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Portfolio analysis:
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is designed to reveal whether the organisation has: – too many declining products or services –
too few products or services with growth potential
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insufficient product or service profit generators to maintain present organisation performance or to provide investment funds for the nurturing of tomorrow’s successful ventures
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portfolio analysis can be very valuable in assessing how the balance of activities contributes to the strategic capability of the organisation
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should be applied to SBUs, that is units dealing with particular market segments not whole markets
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will result in different targets and expectations for different parts of the organisation, which will impact on the resource allocation processes – both capital and revenue budgets
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in this section the BCG matrix is discussed in detail and alternatives in outline. The examiner has stated that he will not explicitly ask for a specific portfolio tool but will expect you to use whichever models are most useful in the scenario given.
The Boston Consulting Group (BCG) growth share matrix
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The twobytwo matrix classifies businesses, divisions or products according to the present market share and the future growth of that market.
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Growth is seen as the best measure of market attractiveness. Market share is seen to be a good indicator of competitive strength.
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The money value of sales is indicated by the relative size of the circle.
Interpretation of the matrix The primary assumption of the BCG matrix is that the higher an organisation’s market share, the higher its profitability and the lower its costs due to economies of scale, the experience curve and improved bargaining power. On this basis, products are placed into one of four subdivisions.
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Cash cows, with a high relative market share in a lowgrowth market and should be generating substantial cash inflows.
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Stars, which have a high relative market share in a highgrowth market and may be in a later stage of their product life cycle. A star may be only cashneutral despite their strong position, as large amounts of cash may need to be spent to defend an organisation’s position against competitors. Stars represent the best future prospects.
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Problem children, or question marks, characterised by a low market share in a highgrowth market. Substantial net cash input is required to maintain or increase market share.
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Dogs, with a low relative market share in a lowgrowth market. Such a product tends to have a negative cash flow, that is likely to continue.
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An organisation would want to have in a balanced portfolio:
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cash cows of sufficient size and/or number that can support other products in the portfolio
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stars of sufficient size and/or number which will provide sufficient cash generation when the current cash cows can no longer do so
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problem children that have reasonable prospects of becoming future stars
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no dogs or – if there are any – there would need to be good reasons for retaining them.
Expandable text BCG decision making aspects
Strategic movements on the BCG matrix A product’s place in the matrix is not fixed for ever as the rate of growth of the market should be taken into account in determining strategy.
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Stars tend to move vertically downwards as the market growth rate slows, to become cash cows.
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The cash that they then generate can be used to turn problem children into stars, and eventually cash cows.
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The ideal progression is illustrated below:
Criticisms of the BCG matrix
• • • •
The matrix uses only two measures.
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Not all dogs should be condemned.
The matrix encourages companies to adopt holding strategies. The matrix implies only those with large market shares should remain. The matrix implies that the most profitable markets are those with high growth.
Expandable text Criticisms of the BCG matrix
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Test your understanding 4
The marketing manager of Fruity Drinks Ltd has invited you in for a chat. Fruity Drinks Ltd provides fruit juices to a number of supermarket chains, that sell them under their own label. ‘We’ve got a large number of products, of course. Our freshly squeezed orange juice is doing fine – it sells in huge quantities. Although margins are low, we have sufficient economies of scale to do very nicely in this market. We’ve got advanced production and bottling equipment and longterm contracts with some major growers. No problems there. We also sell freshly squeezed pomegranate juice: customers loved it in the tests, but producing the stuff at the right price is a major hassle – all the seeds get in the way. We hope it will be a winner, once we get the production right and start converting customers to it. After all, the market for exotic fruit juices generally is expanding fast.’ What sort of products, according to the BCG classification,are described here?
Other portfolio matrices The public sector portfolio matrix A similar approach can be used to assess the different services provided by public sector organisations. The dimensions of the matrix are:
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can the service can be provided effectively while giving value for money the desirability of the service – public support and funding attractiveness.
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Test your understanding 5
Discuss the major problem with the application of this model.
The Directional Policy Matrix • The Directional Policy Matrix (DPM) is a method of business portfolio analysis formulated by Shell International Chemical Company.
Rather than simply market growth and share, the DPM considers a range of factors including the following. Business sector prospects
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Market – demographic factors, growth, seasonality, maturity.
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Technology – sophistication, rate of change, lead time, patents.
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Geography – location, markets, communications, environment.
Competition – number and size of competitors, price competition, barriers to entry, substitutes. Economic – leverage, capital intensity, margins. Government – subsidies/grants, purchases, protection, regulation, taxation. Social – pressure groups, trade unions, availability of labour.
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Strategic choice I Competitive capabilities
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Market – share, growth, product maturity, product quality, product mix, marketing ability, price strategy, customer loyalty.
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Technological – skills, patent protection, R&D, manufacturing technology.
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Production – costs, capacity utilisation, inventory control, maintenance, extent of vertical integration.
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Personnel – employee quality, top management quality, industrial relations, trade union strength, training, labour costs.
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Financial – resources, capital structure, margins, tax position, financial control, investment intensity.
Expandable text Example of DPM criteria
Expandable text DPM strategic choices
Expandable text Example of using DPM
The market attractiveness/SBU strength matrix A more sophisticated directional policy matrix has been developed by General Electric, McKinsey and Shell. As can be seen in the diagram below, the matrix has four dimensions on two axes.
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Industry attractiveness – which includes the size, growth, diversity, profitability and competitive structure of the industry, as well as relevant political, economic, social and technological factors.
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Business or competitive strengths – another composite dimension including size, growth, share, position, profitability, image, strengths and weaknesses.
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Size of industry – products or services (strategic business units) are entered onto the policy matrix as circles, with size proportional to turnover size of circle.
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Share of industry – represented by a segment of the circle.
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Expandable text Further details
Expandable text Additional example
The Ashridge portfolio display The Ashridge portfolio display, or parenting matrix, developed by Campbell, Goold and Alexander, focuses on the benefits that corporate parents can bring to business units and whether they are likely to add or destroy value (as discussed earlier in this chapter). The matrix considers two particular questions.
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How good is the match between perceived parenting opportunities and the parent’s skills?
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How good is the match between the CSFs of the business units and the skills and resources that the parent can bring?
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Expandable text Ashridge portfolio display
Expandable text Ashridge additional example
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5 Chapter summary
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Test your understanding answers
Test your understanding 1 Strategic planning
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Senior management can put pressure on business units to develop new ideas and products.
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Problems with communication may slow new developments. Where innovation does arise, it is more likely to be transferred between different SBUs who share similar CSFs. (Note: only if senior management see the potential for this!)
Financial control
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Inherent risk aversion may prevent innovative ideas being adopted Emphasis on financial performance and shorttermism may stifle radical innovations that take time to emerge.
Strategic control
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Head office can still encourage innovation. Local ownership of strategy may see some managers trying to drive the business forward through innovation without the shortterm financial constraints of the financial control model.
Test your understanding 2 The alternatives may be:
• • •
a decision to divest of the subsidiary a takeover of the group nothing, followed by a general decline of the business.
Test your understanding 3 They would consider themselves a parental developer – using their own competences to add value to the businesses by applying the specific skills (in this case marketing) required by the business units.
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Test your understanding 4 Orange juice is a cash cow. Pomegranate juice is a questionmark, which the company wants to turn into a star.
Test your understanding 5 The major problem with the application of the public sector portfolio matrix is that its dimensions (the organisation’s ability to serve effectively by providing value for money, and the public’s need and support and the funding attractiveness) are all subjective, and largely dependent on the user’s own perceptions as to what the body should be doing, and what the public sector body is good at.
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Strategic choice II Chapter learning objectives Upon completion of this chapter you will be able to:
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analyse, in a scenario, the development directions available to an organisation using Ansoff Matrix and a TOWS matrix
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explain the various methods available (internal development, mergers, acquisitions and alliances) to pursue chosen strategic directions
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evaluate, in a scenario, through the strategic clock, the generic strategy options of: cost leadership, differentiation, focus
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explain, giving examples, the use of: pricebased strategies, differentiation, lockin in sustaining competitive advantage
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define ‘hyper competition’ and describe the strategies of: repositioning, overcoming competitors’ barriers, competing successfully, overcoming competitors’ marketbased moves explaining how these can be helpful in dealing with hyper competition
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explain the various ways in which collaboration improves competitiveness, relating this to the five forces model
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explain the use of the success criteria of suitability, acceptability and feasibility in appraising a chosen strategy
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1 Introduction This chapter looks at the classification of strategies that businesses can adopt. Firstly it describes corporate strategy (directions for and methods of growth) and then looks at competitive strategies. The chapter ends by suggesting how a variety of strategies can be evaluated to choose the one that should be pursued.
2 SWOT (TOWS) analysis and strategic direction Introduction Strategic direction should ‘fit’ the results of the swot analysis. Used in this way a SWOT analysis is sometimes referred to as a TOWS matrix. Internal factors Externalfactors
Strengths (S)
Opportunities (O)
Examine Examine strategies strategies that use that take advantage strengths to make of opportunities by use of overcoming or opportunities avoiding (SO). weaknesses (WO).
Threats (T)
Examine Examine strategies strategies that use that minimise the strengths to effect of weaknesses overcome or and avoid or avoid threats (ST). overcome threats (WT).
Weaknesses (W)
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Some possible scenarios
Expandable text Examples of the use of the TOWS matrix
Test your understanding 1
Mobius Ltd is an engineering company and has a reputation for high quality production of complex metal pieces to strict deadlines. It has recently been suffering falling sales because composite materials, such as carbon fibre, have been able to replace many metal components. Required: Using a TOWS/SWOT analysis, what are the firm’s options?
3 Ansoff’s matrix Introduction
Ansoff’s matrix is a very useful tool and can be used in nearly every scenario. It neatly summarises many of the strategic options facing organisations.
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The matrix Existing Products
Existing A Markets •
• • • •
New
B Consolidation Withdrawal
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Product development
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Can be particularly good if using existing resources, distribution channels, etc.
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New products could arise from R&D, joint ventures, buying in other peoples’ products or licensing.
Efficiency gains Market penetration/growth. This could involve cutting prices, spending more on advertising and/or minor product improvements.
C
Markets •
New Products
Basic idea is to get more money from existing customers.
D Market development
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This involves finding new markets for existing products.
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These could be new segments in current markets (e.g. new age groups) or overseas markets.
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CSF is market attractiveness – would the firm have a competitive advantage in the new market, can barriers to entry be overcome?
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Diversification
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Discussed in more detail below.
This could be related to what we do at the moment (e.g. vertical integration) or unrelated (conglomerate diversification).
Generally, risk increases from quadrant A to quadrant D (risk in quadrants B and C probably about equal).
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Related diversification There are two types of related diversification:
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vertical integration
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horizontal diversification (sometimes known as concentric diversification).
Vertical integration Taking over a supplier (backwards vertical integration) or customer (forwards vertical integration). Advantages
Disadvantages
Cost
Cost
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Economies of combined operations
•
• •
Economies of internal control
It may not be cheaper to do it oneself – especially if suppliers have economies of scale
• • • •
Increased operating gearing
Economies of avoiding the market
Quality
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Tap into technology – enhanced ability to differentiate
Barriers
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Assured supply/demand Defence against lockout Create barriers by controlling supplies/distribution/retail outlets
Dulled incentives Capital investment Reduced flexibility to switch to cheaper suppliers
Quality
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Cut off from suppliers/customers
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Differing managerial requirements
Reduced flexibility to switch to better suppliers
Horizontal diversification Horizontal diversification refers to development into activities that are competitive with, or directly complementary to, a company’s present activities. There are three cases. (a) Competitive products. Taking over a competitor can have obvious benefits, leading eventually towards achieving a monopoly. Apart from active competition, a competitor may offer advantages such as completing geographical coverage.
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Strategic choice II (b) Complementary products. For example, a manufacturer of household vacuum cleaners could make commercial cleaners. A full product range can be presented to the market and there may well be benefits to be reaped from having many of the components common between the different ranges. (c) Byproducts. For example, a butter manufacturer discovering increased demand for skimmed milk. Generally, income from byproducts is a windfall: any you get is counted, at least initially, as a bonus.
Illustration 1 – Ansoff’s matrix Airline (SAS) owning a hotel business – horizontal diversification with obvious opportunities for cross selling Rezidor SAS Hospitality is a wholly owned subsidiary of the Stockholm based SAS Group. SAS is owned partly by the three Scandinavian governments and partly by private sector interests in these countries. It currently operates 248 hotels in 47 countries with nearly 50,000 rooms either in operation or under development. It aims to have 700 hotels across its different brands by 2012. Rezidor SAS manages selected Carlson brands in Europe, the Middle East and Africa, Radisson, Park Inn, Regent and Country Inn.
Unrelated/conglomerate diversification
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Diversifying into completely unrelated businesses.
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Often leads to loss of shareholder value.
Not clear where added value comes from – except if an ailing business is turned round.
Conglomerate diversification
Advantages
Disadvantages
• • • • •
Increased flexibility
• •
•
Diversification of risk
Increased profitability
No synergies
Ability to grow quickly
No additional benefit for shareholders
Better access to capital markets •
No advantage over small firms
Avoidance of antimonopoly legislation
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Lack of management focus
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Test your understanding 2
Discuss the advantages and disadvantages for the M Company, a clothes manufacturer, in integrating forward by buying up a chain of retail outlets and integrating backwards by buying a company that manufactures cloth.
4 Organic growth, acquisitions and alliances Advantages of acquisitions over organic growth Acquisition has some significant advantages over internal growth.
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Highspeed access to resources – this is particularly true of brands; an acquisition can provide a powerful brand name that could take years to establish through internal growth.
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Avoids barriers to entry – acquisition may be the only way to enter a market where the competitive structure would not admit a new member or the barriers to entry were too high.
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Less reaction from competitors – there is less likelihood of retaliation because an acquisition does not alter the capacity of the competitive arena.
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It can block a competitor – if Kingfisher’s bid for Asda had been successful it would have denied Walmart its easy access to the UK.
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It can help restructure the operating environment – some mergers of car companies were used to reduce overcapacity.
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Relative price/earnings ratio – if the P/E ratio is significantly higher in the new industry than the present one, acquisition may not be possible because it would cause a dilution in earnings per share to the existing shareholders. But if the present company has a high P/E ratio it can boost earnings per share by issuing its own equity in settlement of the purchase price.
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Asset valuation – if the acquiring company believes the potential acquisition’s assets are undervalued, it might undertake an asset stripping operation.
Disadvantages of acquisitions growth There are some disadvantages associated with this method of growth.
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Acquisition may be more costly than internal growth because the owners of the acquired company will have to be paid for the risk already taken. On the other hand, if the company decides on internal growth, it will have to bear the costs of the risk itself.
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There is bound to be a cultural mismatch between the organisations – a lack of ‘fit’ can be significant in knowledgebased companies, where the value of the business resides in individuals.
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Differences in managers’ salaries – another example of cultural mismatch that illustrates how managers are valued in different countries.
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Disposal of assets – companies may be forced to dispose of assets they had before the acquisition. The alliance between British Airways and American Airlines was called off because the pair would have had to free up around 224 takeoff and landing slots to other operators.
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Risk – of not knowing all there is to know about the business it seeks to buy.
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Reduction in return on capital employed – quite often an acquisition adds to sales and profit volume without adding to value creation.
Joint development methods Joint venture
A separate business entity whose shares are owned by two or more business entities. Assets are formally integrated and jointly owned.
A very useful approach for:
• • •
sharing cost sharing risk sharing expertise.
Strategic alliance A strategic alliance can be defined as a cooperative business activity, formed by two or more separate organisations for strategic purposes, that allocates ownership, operational responsibilities, financial risks, and rewards to each member, while preserving their separate identity/autonomy.
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Alliances can allow participants to achieve critical mass, benefit from other participants’ skills and can allow skill transfer between participants.
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The technical difference between a strategic alliance and a joint venture is whether or not a new, independent business entity is formed.
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A strategic alliance is often a preliminary step to a joint venture or an acquisition. A strategic alliance can take many forms, from a loose informal agreement to a formal joint venture.
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Alliances include partnerships, joint ventures and contracting out services to outside suppliers.
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Franchising
The purchase of the right to exploit a business brand in return for a capital sum and a share of profits or turnover.
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The franchisee pays the franchisor an initial capital sum and thereafter the franchisee pays the franchisor a share of profits or royalties.
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The franchisor provides marketing, research and development, advice and support.
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The franchisor normally provides the goods for resale.
• • •
The franchisee buys into a successful formula, so risk is much lower.
The franchisor imposes strict rules and control to protect its brand and reputation. The franchisor gains capital as the number of franchisees grows. The franchisor’s head office can stay small as there is considerable delegation/decentralisation to the franchisees.
Licensing
The right to exploit an invention or resource in return for a share of proceeds. Differs from franchise because there will be little central support.
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Illustration 2 – Organic growth, acquisitions and alliances Joint venture
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Airbus is a joint venture between European Aeronautic Defence and Space Company (EADS) and BAE Systems.
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SAESL is a S$185 million joint venture between RollsRoyce (30 per cent), Hong Kong Aero Engine Services Limited (20 per cent) and SIA Engineering Company (50 per cent). SAESL performs the repair, overhaul and maintenance of newgeneration RollsRoyce aircraft engines.
Strategic alliance
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In the early 1990s, Kodak and Fuji (two rival film manufacturers) formed a strategic alliance with Minolta, Canon and Nikon (camera manufacturers) to develop the Advanced Photo System (a system that, among other things, made it easier to load and unload films from cameras).
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Strategic alliances are important in the airline industry where there are marketing and scheduling agreements, as well as access to airport facilities and perks, such as frequentflier miles and business class lounges. Major alliances are Star Alliance between United, Germany’s Lufthansa, SAS of Scandinavia, Singapore Airlines and nine other airlines, and oneworld, involving American Airlines, British Airways, Cathay Pacific Airways, Qantas and four other airlines. For example, Lufthansa now handles marketing for SAS in Germany, while SAS reciprocates in Scandinavia.
Franchising
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Very important in the retail trade. Many MacDonald and Benetton outlets are franchises.
Licensing
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The CocaCola Company sells premium fruit juices under the brand ‘Minute Maid’. The juices are produced in each country by local companies under licence. It does not make much sense to ship juices around the world if they can be made locally.
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The Chinese computer firm Lenovo has a licensing agreement that authorises it to develop, manufacture and distribute Cokebranded notebooks. Both companies are major sponsors of the 2008 Olympics and the strategy is an important part of Lenovo’s plans to build an internationally recognised brand. Formerly known as Legend, the group rebranded in 2003 after buying IBM’s PC division.
Expandable text Further detail on franchising
Test your understanding 3
Which of licensing, joint venture, strategic alliance and franchising might be the most suitable for the following circumstances? (1) A company has invented a uniquely good ice cream and wants to set up an international chain of strongly branded outlets. (2) Oil companies are under political pressure to develop alternative, renewable energy sources. (3) A beer manufacturer wants to move from their existing domestic market into international sales.
5 Competitive strategy options – the strategic clock Generic strategies: cost leadership, differentiation and focus Professor Michael Porter identified three generic strategies through which an organisation could achieve competitive advantage.
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Cost leadership, where there is great emphasis on keeping costs down. This opens up the profit margin by lowering costs, ideally more than any competitor can.
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Differentiation, where a better product or service is sold. This opens up the profit margin by raising selling prices.
Additionally an organisation can choose a focus strategy, where the organisation concentrated on a small segment of the market. Within the focus strategy, the organisation must choose whether or not to become a cost leader or a differentiator.
Usually, large organisations will find it easier than small ones to become cost leaders, because large organisations:
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• • •
have great buying power are well down an experience curve and can divide marketing and development costs over large volumes.
Small organisations can survive by making better (or at any rate, different products) and by specialising in a small market segment. Small market segments might be overlooked or be thought of as trivial by large firms that concentrate on the volume market. A company that manages neither to become a cost leader nor to differentiate its products will be stuck in the middle – trapped between high costs and low selling prices.
Illustration 3 – Competitive strategy options – strategic clock Car companies: cost leadership: Toyota, Nissan, Volkswagon differentiation: Mercedes, Lexus focus: Porsche, Smart cars.
Test your understanding 4
What types of generic strategies are the folllowing companies adopting? (1) Walmart (2) Saga Holidays (specialises in holidays for those over 55) (3) Bang and Olufson
Expandable text
The strategy clock
An alternative way of identifying strategies that might lead to competitive advantage is to look at ‘market facing’ generic strategies.
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This approach is based on the assumption that competitive advantage is achieved if a firm supplies what customers want better or more effectively than its competitors.
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Better could mean a more suitable product or service, or could mean a cheaper one of adequate quality.
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In effect, customers are looking for what they perceive as best ‘value for money’.
(Adapted from the work of C. Bowman and D. Faulkner ‘Competitive and Corporate Strategy Irwin 1996) Routes 1 and 2 are pricebased strategies.
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1 = no frills Commoditylike products and services. Very pricesensitive customers. Simple products and services where innovation is quickly imitated – price is a key competitive weapon. Costs are kept low because the product/service is very basic.
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2 = low price Aim for a low price without sacrificing perceived quality or benefits. In the longrun, the low price strategy must be supported by a low cost base.
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3 = hybrid strategy Achieves differentiation, but also keeps prices down. This implies high volumes or some other way in which costs can be kept low despite the inherent costs of differentiation.
Routes 4 and 5 are differentiation strategies.
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4 = differentiation Offering better products and services at higher selling prices. Products and services need to be targeted carefully if customers are going to be willing to pay a premium price.
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5 = focused differentiation Offering high perceived benefits at high prices. Often this approach relies on powerful branding. New ventures often start with focused strategies, but then become less focused as they grow and need to address new markets.
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6, 7, 8 = failure strategies Ordinary products and services being sold at high prices. Can only work if there is a protected monopoly. Some organisations try option 8 by sneakily reducing benefits while maintaining prices.
Note that an organisation can have identified several strategic business units (SBUs). A SBU is a part of an organisation for which there is a distinct external market. Different strategies can be adopted for different SBUs. For example, Toyota and Lexus (part of Toyota) operate as separate SBUs with different strategies. Some fashion businesses successfully separate their exclusive ranges of clothing from their diffusion lines.
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Test your understanding 5
Where on the strategy clock should the following companies or products be placed? (1) MacDonalds (2) Zara (3) Apple iPods.
6 Sustaining competitive advantage Pricebased strategies Sustaining competitive advantage through low prices can beachieved by:
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accepting and tolerating reduced margins (i.e. prices have been reduced but costs stay relatively high. The margin per unit will be low, but overall profitability might be acceptable if volumes are high enough
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reducing costs (the margin is good even at low prices). Efficiency, experience, siting production in lowcost economies
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winning a price war. This will be a shortterm strategy aimed at forcing competitors out of the market. Once there are fewer competitors, the longer term strategy can be reviewed
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focus on specific market segments where low prices are very important. Better profits from other areas of the business can help to fund low margins in this segment.
Differentiationbased strategies Sustaining competitive advantage through high quality can be achieved by:
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reinvesting in continual research, development and the constant improvement in products and services
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making imitation difficult. For example, unique resources and capabilities. Reinvestment can help to create these assets
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difficulties in the transfer of resources and competences. This is more difficult to achieve in peoplebased industries as employees can change jobs taking with them valuable skills and knowledge. Brand is an important asset to impede the transfer of resources and competences
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switching costs create another barrier to transfer – where it is too expensive and troublesome for a customer to switch suppliers.
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Test your understanding 6
How might a company that provides an internet search engine sustain competitive advantage?
Lockin This approach can work for both pricebased and differentiationbased strategies. It happens where a business’ products become the industry standards. Examples are:
• • •
Microsoft Windows Dolby Internet explorer
These are not necessarily the best products but have such market dominance that competitors find it very difficult to break into the market. The major threat to such businesses is likely to be attention from antimonopoly regulators.
7 Hypercompetition Introduction
Hypercompetition: where the frequency, audacity, innovation and agressiveness of competitors creates an environment of constant movement and change. Examples are seen in:
• • •
the impact of the internet on the music business technological developments in telephony bioengineering/pharmaceuticals.
Hypercompetition means that sustaining competitive advantage through adopting a stable pricebased strategy or differentiationbased strategy becomes more difficult as products and markets change quickly and radically.
Strategies for hypercompetitive environments
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Repositioning on the strategy clock
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chapter 7 For example, an organisation that was a differentiator could cut prices so that its former, relatively exclusive products, have price cuts and the products are perceived as being ‘nofrills’.
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Competing successfully Do not be satisfied with current products; be unpredictable and radical; be a leader not a follower. It is, of course, difficult for an organisation to make the case for abandoning a currently successful formula so as to keep ahead of competition.
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Fight and overcome competitors’ strategies For example, act to prevent lockin by fighting a competitors’ plan to gain market dominance with a new product. Imitate competitors and go one better.
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Barriers to entry may be easier to overcome in hypercompetition. If technology is changing, the competitors onetime safe, dominant position can become tenuous.
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Test your understanding 7
The food industry has undergone a transformation in the last 20 years or so, with changes to both the range of food, production, sourcing and distribution methods. How has fresh salmon changed its position on the strategy clock?
8 The use of collaboration Introduction So far, much of the discussions on strategy have concentrated on competition. However, collaboration can sometimes be helpful. For example, collaboration can lower competitive pressures and can reduce costs.
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Strategic choice II Of course, businesses have to be careful that collaboration does not stray into illegality, for example price fixing and certain other restrictive practices.
How collaboration can bring advantages This will be looked at in terms of Porter’s five forces analysis.
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Buyer pressure. This can be reduced by forming close alliances with customers. For example, collaboration on design and research and development. Once successful alliances are made, customers will be relatively relucant to switch to another supplier.
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Supplier pressure. For example, supermarkets form close collaborations with suppliers to manage their inventories.
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Threat of new entrants. Collaboration between existing rival companies can spread marketing and research costs more thinly, making it more difficult for new companies to enter the market.
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Substitute products. The issues here are the same as for new entrants. Many trade associations exist to allow collaboration on an industrywide level, for example by lobbying.
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Test your understanding 8
How could collaboration between rival chains of supermarkets be used to promote genetically modified food?
9 Strategy evaluation Introduction There are three conditions for successful choice.
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Suitability – whether the options are adequate responses to the firm’s assessment of its strategic position.
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Acceptability – considers whether the options meet and are consistent with the firm’s objectives and are acceptable to the stakeholders.
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Feasibility – assesses whether the organisation has the resources it needs to carry out the strategy.
Suitability Suitability is a useful criterion for screening strategies, asking the following questions about strategic options.
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Does the strategy exploit the company strengths, such as providing work for skilled craftsmen or environmental opportunities, e.g. helping to establish the organisation in new growth sectors of the market?
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How far does the strategy overcome the difficulties identified in the analysis? For example, is the strategy likely to improve the organisation’s competitive standing, solve the company’s liquidity problems or decrease dependence on a particular supplier?
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Does the option fit in with the organisation’s purposes? For example, would the strategy achieve profit targets or growth expectations, or would it retain control for an ownermanager?
Acceptability Acceptability is essentially about assessing risk and return and is strongly related to stakeholders’ expectations. The issue of ‘acceptable to whom?’ thus requires the analysis to be thought through carefully. Some of the questions that will help identify the likely consequences of any strategy are as follows.
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How will the strategy impact shareholder wealth? Assessing this could involve calculations relating to NPV, SVA or EVA.
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How will the organisation perform in profitability terms? The parallel in the public sector would be cost/benefit assessment.
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How will the financial risk (e.g. liquidity) change?
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Will the function of any department, group or individual change significantly?
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Will the organisation’s relationship with outside stakeholders, e.g. suppliers, government, unions, customers need to change?
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Will the strategy be acceptable in the organisation’s environment, e.g. higher levels of noise?
What effect will it have on capital structure (gearing or share ownership)?
Feasibility Assesses whether the organisation has the resources it needs to carry out the strategy. Factors that should be considered can be summarised under the Mword model.
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Machinery. What demands will the strategy make on production? Do we have sufficient spare capacity? Do we need new production systems to give lower cost/better quality/more flexibility/etc?
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Management. Is existing management sufficiently skilled to carry out the strategy.
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Money. How much finance is needed and when? Can we raise this? Is the cash flow feasible?
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Manpower. What demands will the strategy make on human resources? How many employees are needed, what skills will they need and when do we need them? Do we already have the right people or is there a gap? Can the gap be filled by recruitment, retraining, etc?
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Markets. Is our existing brand name strong enough for the strategy to work? Will new brand names have to be established? What market share is needed for success – how quickly can this be achieved?
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Materials. What demands will the strategy make on our relationships with suppliers. Are changes in quality needed?
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Makeup. Is the existing organisational structure adequate or will it need to be changed?
Illustration 4 – Strategy evaluation Suitable: A company that depends on one supplier for an important component, decides to take over that supplier. Unsuitable: A company with weak marketing abilities decides to expand abroad. Acceptable: A company where most shareholders are pension funds decides to expand using finance that does not cause dividends to be cut. Unacceptable: A company with a very strong environmentfriendly reputation decides to use genetically modified crops. Feasible: A company with strong cash balances acquires a competitor for cash. Nonfeasible: A company with a manufacturing base in Germany decides to cut prices radically to match those of a producer based in a lowcost economy.
Test your understanding 9
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Test your understanding 10
Blueberry is a quoted resort hotel chain based in Europe. The industry The hotel industry is a truly global business characterised by the following:
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Increasing competition
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In particular the range of facilities, especially spas, is becoming more important as a differentiating factor.
An increasing emphasis on customer service with higher standards being demanded.
Performance
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Blueberry offers services at the luxury end of the market only, based on a strong brand and prestigious hotels – although its reputation has become tarnished over the last five years due to variable customer satisfaction levels.
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Despite a reputation for having the most prestigious coastal resort hotels along the Mediterranean in 20X0, Blueberry was lossmaking in the financial years 20X4/5 and 20X5/6.
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To some extent this situation has been turned around in 20X6/7 with an operating profit of €11 million. However shareholders are putting the board under pressure to increase profits and dividends further.
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Management have responded to this by setting out an ambitious plan to upgrade hotel facilities throughout the company and move more upmarket. The bulk of the finance is planned to come from retained profits as Blueberry has historically kept its financial gearing low.
Acquisition opportunity The management of Blueberry have been approached by the owner of ‘The Villa d’Oeste’, a luxury hotel on the shores of Lake Como in Italy, who is considering selling it. The hotel has an international reputation with worldclass spa facilities and generates revenue throughout most of the year due to Lake Como’s mild microclimate. The asking price will be approximately €50m. Required Outline the issues to be considered when assessing the acquisition. KAPLAN PUBLISHING
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Test your understanding answers
Test your understanding 1 The company’s strengths are:
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good quality control good project management (strict deadlines are met) competence with metalwork high engineering ability.
The threat arises from metal components being replaced by composite ones. The company is in the ST segment and needs to examine strategies that use strengths to overcome or avoid threats. Possible strategies for Mobius Ltd are:
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become even better known for metalwork. Some competitors will withdraw from the market as sales fall leaving more scope for Mobius Ltd. Presumably not all metal components will be replaced by composites
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capitalise on its engineering, quality control and project management strengths – possibly by branching into consultancy
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develop competence in manufacturing from composites – the engineering, quality control and project management abilities that Mobius Ltd has should make this easier.
Test your understanding 2 There are several reasons why M might pursue forward integration. It will be easier for a chain of retail outlets to differentiate its clothes from those of its competitors through branding. This gives an opportunity for higher margins to be earned. The M Company can produce clothes as the shops demand them (JIT), leading to reductions in inventory levels. They will also have a guaranteed customer for its output. There are also reasons against this course of action. The reaction of the customers that the M Company presently supplies may be hostile. If they stop stocking M Company’s products, will the chain of retail outlets be able to sell enough to cover this fall in demand? What is the likely effect of the increased costs of distributing clothes to the shops, rather than to the depots of current customers?
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Strategic choice II A strategy of backward integration into the supply chain would give the M Company a dedicated supplier with both guaranteed quality and price. The material could be manufactured when required by M Company, leading to lower inventory levels. The downside to this course of action is that, if alternative cheaper suppliers become available, the M Company will not be able to use them, since it will be committed. There are also arguments against integration generally, whether forwards or backwards. Being successful may require different skills from those presently possessed by the company. For example, M Company may know little about retailing or material manufacturing. To be successful, it will have to stretch its current competencies to cover these areas. In addition, there may be a very different focus for each of the businesses. For example, the chain of retail outlets may well be successful if it can differentiate its products from those of its competitors using innovative colours and material, while the cloth manufacturer is likely to be successful by keeping its costs low by using basic materials and standardised colours. It will be difficult for the M Company to maintain both of these at the same time.
Test your understanding 3 (1) A franchise arrangement would work well here. There is more than just manufacturing involved – there is the whole retail offering, and entering into franchise agreements would be a quick, effective way of expanding. (2) Unless the oil companies felt that, because of their size, there was no need for joint research, development, marketing and lobbying, a strategic alliance of some sort could be useful. Research costs and findings could be shared. Together they could bring powerful pressure to bear on governments to, for example, allow more generous time scales for implementation of the new technology. Alternatively, the new energy technology could be developed within a joint venture organisation. (3) Almost certainly, this company would expand by licensing local brewing companies to make and distribute its product.
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Test your understanding 4 (1) Walmart – cost leadership. Legendary attention to keeping costs low. (2) Saga Holidays – focus. (3) Bang and Olufson – differentiation. Upmarket, very stylish, home entertainment equipment.
Test your understanding 5 (1) MacDonalds Probably nofrills. Prices are low, products are standardised and not perceived to be of huge value. (2) Zara Zara is a Spanishbased international clothing retailing business. It specialises in the fast production of small runs of veryupto date fashions, sold at low prices. Probably a hybrid approach. (3) Apple iPods Very stylish MP3type players. Relatively expensive compared to many competitors’ products. Probably a hybrid strategy.
Test your understanding 6 Search engines (such as Yahoo and Google) are provided free to consumers. The companies make their profits through advertising. Advertisers want a large audience so the more ‘hits’ a search engine gets, the more revenue it will earn from advertising. Therefore, it is essential that the search engine is perceived by users as being efficient and comprehensive so that many users will be attracted to it. The search engine must therefore differentiate itself by the quality of its searches.
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This requires:
• • • •
continual research and development attracting and keeping excellent staff branding patenting search algorithms to make them impossible or difficult to imitate.
Test your understanding 7 At one time, fresh salmon was a differentiated product. It was relatively scarce and expensive, and caught in the wild in small volumes using hook and line. Fish farming technology was developed and salmon has become a relatively lowpriced food product for many people. Some consumers, of course, differentiate between wild and farmed salmon, and wild salmon still remains differentiated.
Test your understanding 8 (a) Collaborative research into the effects of growing and consuming GM foods. (b) Lobbying governments. (c) Marketing – a united front. (d) Simultaneous stocking of new foods.
Test your understanding 9 Suitability Probably suitable as production costs will be reduced, allowing the company to compete better on price and/or make better profits. Acceptability Not acceptable to present employees who will be made redundant – but their bargaining position is probably weak. It could be important for the firm’s reputation to handle closure and redundancy well.
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chapter 7 Probably acceptable to customers. It’s unlikely that they care much where the goods are made provided their quality is as expected. Almost certainly accceptable to shareholders as profits will increase. Feasibility There is no particular reason to think that this plan would not be feasible. The company should carry out some investigation, however, to check that imports of electrical goods from China into the European Union are unlikely to face tariff or quota restrictions. (The EU recently imposed restrictions on footwear being imported from China to protect local businesses.)
Test your understanding 10 Suitability
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The hotel market is becoming increasingly more competitive, so it might make more sense for Blueberry to try to diversify its activities more.
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Furthermore, the acquisition does not address Blueberry's underlying problems of inconsistent customer service levels.
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On the other hand, the Villa d’Oesta already has a world class spa facility and would fit well into Blueberry’s current strategy of moving more ‘upscale’.
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Also the goodwill attached to the Villa’s reputation could enhance Blueberry’s image, depending on branding decisions.
Feasibility
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Financing the acquisition could prove problematic:
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Equity finance: Given losses in two out of the last three years, Blueberry may struggle to raise the purchase price via a rights issue.
Debt finance: Historically, the Board have chosen to keep Blueberry’s financial gearing level relatively low. Blueberry’s existing clientele of shareholders may thus resist any major increase in gearing.
Acceptability
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Growth by acquisition is generally quicker than organic growth, thus satisfying institutional shareholders’ desire to see growth in revenues and dividends.
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Further work is needed to assess whether the 50m asking price is acceptable.
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Buying another hotel should enable Blueberry to gain additional economies of scale with respect to insurance, staff costs such as pensions and purchasing economies on drinks.This should boost margins and profitability further.
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The new hotel would fit well into Blueberry’s existing portfolio of hotels, for example, by having significant cash inflows throughout the year in contrast to Blueberry’s highly seasonal business, thus reducing the overall level of risk.
Preliminary Recommendations
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The opportunity to acquire the Villa d’Oeste should be rejected on the grounds that financing the acquisition would be problematic at present.
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Blueberry should instead focus on improving facilities and quality in existing hotels before looking to expand through acquisition.
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Organisational structure Chapter learning objectives Upon completion of this chapter you will be able to:
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advise on how organisations can be structured to deliver a selected strategy
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describe Mintzberg’s six organisational configurations
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describe how responsibility and authority for operational and strategic decisions can be vested inside organisations in general
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describe from national, international and global perspectives the opportunities and problems arising from diversification and international scale
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describe, with examples, the use of: – outsourcing
describe the types of control processes that can be used (input/output and direct/indirect), emphasising the planning process
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strategic alliances
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networks
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the virtual organisations in delivering an organisation’s strategy.
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1 Factors affecting organisational structure The links between strategy and structure The influences that have a bearing on organisational structure and design include:
• • • • • •
strategic objectives nature of the environment diversity future strategy technology people.
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Different structural types (functional, divisional, matrix) were studied in detail in paper F1 (or old syllabus 1.3). The key emphasis in P3 is matching structure with strategy.
Functional structure Functional structures are usually found in smaller organisations, or within individual divisions in a larger organisation with a divisional structure. Advantages
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Pooling of expertise, through the grouping of specialised tasks and staff.
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No duplication of functions and economies of scale. Senior managers are close to the operation of all functions.
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The facilitation of management and control of functional specialists (suited to centralised organisations).
Disadvantages
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‘Vertical’ barriers between functions, that may affect work flow (creating coordination problems) and information flow (creating communication problems).
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Focuses on internal processes/inputs rather than outputs such as quality and customer satisfaction through a horizontal value chain.
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Struggles to cope with change, growth and diversification. Senior management may not have time to address strategic planning issues.
Illustration 1 – Factors affecting organisational structure An example of a functional structure.
Divisional structures Where the functionally structured business grows by diversification, a functional structure will be inappropriate, and the divisional structure based on products, services or geographical areas is likely to be adopted. Advantages
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Flexibility – divisions can be closed or created to respond to changes in organisational strategy.
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Specialist expertise is built up relating to a particular product or market segment.
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Managers of divisions have a greater personal interest in the strategy for their own division.
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The enabling of performance management (and hence control) of businesses by head office from a distance.
Disadvantages
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High central management costs.
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Strategic management can be a complex hierarchical process.
Duplication of effort with all functions represented within divisions. Vertical barriers between divisions that may prevent information sharing and cooperation between divisions.
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Matrix organisations The matrix structure is a twodimensional structure combining both a functional and divisional structure, for example product, service or geographical divisions and functional areas, in order to capitalise on combinations of expertise that exist in the organisation, but which are stifled by normal hierarchical structures. Matrix structures:
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organise horizontal groupings of individuals or units into teams that operationally deal with the strategic matter at hand
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are organic with open communications and flexible goals
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can creatively serve the needs of strategic change that otherwise might be constrained by more traditional structures
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retain functional economies and product, service or geographical co ordination
may be established as a permanent structure or be temporary to address a particular strategic commitment, such as an export research group to study international markets in a multiproduct trading company might establish, or a unique product group for a limitedduration contract
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can improve motivation through: – people working participatively in teams –
specialists broadening their outlook
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encouraging competition within the organisation
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may lead to problems of dual authority with conflict between functional and product or geographical managers leading to individual stress arising from threats to occupational identity, reporting to more than one boss and unclear expectations
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may incur higher administrative costs.
Illustration 2 – Factors affecting organisational structure Example of a matrix organisation A multinational company produces three sets of product ranges (Product A, Product B and Product C) and sells the product in three geographical areas (Europe, USA and South America). The management of each product range is equally important, as is the responsiveness to the needs of the different geographical areas. The product managers and area managers have equal weight. Thus the manager of the USA area must liaise with the managersof Product A, B and C but does not have authority over them or vice versa.
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Test your understanding 1
Describe four alternative organisation structures suitable for multinational organisations.
Centralisation v decentralisation One factor in determining the flexibility of a structure is the level at which decisions are made. In centralised organisations the upper levels of an organisation’s hierarchy retain the authority to take most decisions. The choice of organisation will depend to a certain extent on the size of the organisation and the scale of its activities, such that the functional structure is likely to be centralised, and the divisional structure is likely to be decentralised. Decentralisation:
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is more likely in largescale organisations
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allows frontline staff to respond flexibly to customer demands without reference upwards to senior management
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allows local management (of dispersed units) to respond flexibly to local market conditions without reference upwards to head office.
gives authority to make specific decisions to units and people at lower levels in the organisation’s hierarchy
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2 Mintzberg’s structural configurations Building blocks and coordinating mechanisms Mintzberg argues that the organisation structure exists to coordinate the activities of different individuals and work processes and that the nature of coordination changes with the increasing size of an organisation. He suggests that there are six main types of structure with configurations based on:
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building blocks: – strategic apex – higher levels of management –
technostructure – provides technical input that is not part of the core activities
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operating core – members involved in producing goods and services
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middle line – middle and lowerlevel management
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support staff – support that is not part of the operating core
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ideology – beliefs and values.
linking (coordinating) mechanisms, that together with the building blocks make up the detailed configuration of the organisation: – a formally determined hierarchy of decision levels, power and responsibility –
a formal flow of information around the organisation
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an informal communication network, the ‘grapevine’
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formal work constellations whereby sections of the organisation set up and operate formal coordinating mechanisms such as working parties and committees
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a system of ad hoc decision processes whereby the organisation responds in a particular manner when it faces a problem.
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3 Planning and control processes Classification of control processes Organisations and their strategies are managed and controlled by the formal and informal processes at work within them. There are a number of different possible processes, any or all of which may operate along side one another. These processes may be:
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formal or informal focused on inputs or on outputs direct or indirect processes.
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Illustration 3 – Planning and control processes Formal control process Examples of control processes include:
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‘all enquiries are to be processed within 48 hours of receipt’ quality sampling to ensure process meets specification the budgeting process.
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Test your understanding 2
Classify the six types of control processes into the following diagram:
Input
Output
Direct
Indirect
Test your understanding 3
Which of these processes have been established in your own organisation in order to ensure strategy is delivered? Do you think they have been effective?
4 Managing international companies Ansoff’s matrix was discussed in Chapter 7 as a model for exploring directions for growth. In this section global strategies are considered and their implications for structure.
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Geographical diversification Reasons why companies pursue a strategy of international diversification
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There are increasing opportunities from global markets, either where products themselves are becoming global or where the organisation’s customers operate on a global basis.
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If local markets are saturated or limited, it may be possible to sell products into new locations using existing skills and infrastructure.
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Risks may be spread as poor results in one market due to local economic conditions can be balanced against good conditions in another.
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It may be possible to take advantage of particular aspects of different locations and markets such as low labour costs.
Possible strategies for geographical diversification
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A multidomestic strategy where products and services are tailored to individual countries and markets, with many activities specific to particular countries.
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A global strategy, where standard products are sold in different countries.
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A balance between the two above strategies, where products are largely global but have minor modifications to suit the requirements of individual countries. There will generally be a tradeoff between scale economies and the need to tailor products or services to local markets.
Issues for consideration
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The increased complexity due to operating in a number of different countries needs to be managed.
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How to gain the maximum benefit from the expertise and advantages of particular countries, and which parts of the operation to carry out in which country, for example whether to manufacture in one location and export or manufacture locally, perhaps to take advantage of low labour costs or to minimise transport costs.
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The attractiveness of local markets, which will depend on: – the political environment, for example the stability of the government or the level of support offered to foreign companies –
the strength of the local economy
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the local infrastructure, including transport, communications, local human resource and any barriers to trade
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the similarity of the local culture and whether the same products will be acceptable in different countries. This may be more important for service businesses.
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5 External relationships Types of external relationships Relationships with other organisations can be as important in ensuring success as the internal structure. There are a number of forms that these relationships can take, including:
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outsourcing, where products and services, such as IT, that were previously provided within the organisation are supplied by outside organisations
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strategic alliances, cooperative business activities, formed by two or more separate organisations for strategic purposes
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networks, relationships outside the traditional organisation boundaries virtual organisations, which are constructed from administratively and geographically distributed business units or organisations that have rejected the traditional work patterns of bringing people to one location for a fixed period, and organising them into departments and functions.
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Outsourcing Outsourcing has become increasingly common in organisations. The strategic arguments concerning outsourcing were discussed in chapter 6. The key aspects were:
Advantages
Disadvantages
• • • •
Reduced cost
(1) Loss of control
Overcomes skills shortages
(2) Dependency on supplier
Flexibility
Allows organisations to focus on their core (3) Loss of confidentiality skills (4) Loss of inhouse skills
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Test your understanding 4
Could Accountancy Services be outsourced? Are there problems in so doing?
Test your understanding 5
A company is considering whether to outsource its IT provision. Suggest some areas of conflict between the business and its supplier.
Strategic alliances Strategic alliances can take many forms, from loose informal agreements, partnerships and formal joint ventures to contracting out services to outside suppliers.
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Strategic alliances are cooperative business activities, formed by two or more separate organisations for strategic purposes.
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Ownership, operational responsibilities, financial risks and rewards are allocated to each member, while preserving their separate identity and autonomy.
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Strategic alliances are longterm collaborations bringing together the strengths of two or more organisations to achieve strategic goals.
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For example, IBM formed links with Ricoh for distribution oflowend computers. This allowed them to move into the Japanese market quickly, inexpensively and with a relatively high prospect for success.
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Alliances can also help result in improved access to information and technology.
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Some organisations form alliances to retain some of the innovation and flexibility that is characteristic of small companies. They are balancing bureaucracy and entrepreneurship by forming closer working relationships with other organisations.
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Strategic alliances may be used to extend an organisation’s reach without increasing its size.
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Other alliances are motivated by the benefits associated with a global strategy, especially where the organisation lacks a key success factor for some market. This may be distribution, a brand name, a selling organisation, technology, R&D or manufacturing capability. To remedy this deficiency internally would often require excessive time and money.
Networks Outsourcing and strategic alliances are examples of ways in which an organisation depends on relationships with other external organisations. There are a number of other important forms of networks.
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Networks of experts which come together for a particular project or purpose, either on a short or longterm basis.
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Teleworking, where individuals are based in different locations but work together through the use of information technology.
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Onestopshops, where a group of organisations are coordinated centrally so that there is one contact point for the customer with the aim of providing a comprehensive and seamless service.
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Service networks, where the members of the network provide services to customers through any other members of the network.
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Illustration 4 – External relationships Example of a successful network – Amazon Amazon is now one of the best known online retailers. Amazon operates its website but relies on external book publishers and other suppliers, book warehouses, couriers and credit card companies to deliver the rest of the customer experience. These partners are also expected to provide Amazon with information on, for example, stock availability, delivery times, promotional material, etc. The customer feels that they are dealing with one organisation, not many. In addition, the Amazon Marketplace allows other organisations and individuals to sell their goods through the Amazon website, and its Associates system provides a means for others to earn referral fees by directing customers from their own website to Amazon products.
Virtual organisations Virtual organisations are the most extreme form of outsourcing, alliances and networks. The core organisation carries out very few activities and as much work as possible is carried out by other organisations. Virtual organisations have a number of characteristics.
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Virtual organisation entails the development of relationships with a broad range of potential partners, each having a particular competency that complements the others.
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Virtual organising capitalises on the mobility and responsiveness of telecommunications to overcome problems of distance.
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Timing is a key aspect of relationships, with key players using responsiveness and availability to decide between alternatives.
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There must be trust between players separated in space for virtual organisation to be effective.
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Most virtual organisations have an operating core.
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Example of a virtual organisation:
Test your understanding 6
How important do you feel IT is to developing a virtual organisation?
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6 Chapter summary
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Test your understanding answers
Test your understanding 1 The following organisational structures would be suitable for a multinational company.
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International divisional structure – this structure consists of a centralised parent company in one country and functions such as sales and marketing, production, distribution and research and development are established in the various countries where the company has divisions.
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Geographical structure – this structure follows on from the international divisional. In this instance the company is divided up into regions. The longterm strategic plan is formulated by headquarters; the shortterm decisions/strategic plan are taken care of in the region. If the region is large, further subdivision may take place (e.g. by product).
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Productbased structure – here, the regions will not be based on geographical area but on products. The divisions are given responsibility for profits. The regions, although defined by products, may be split down into more manageable sub divisions by geographical area.
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Matrix structure – this structure aims to balance product needs and geographical needs. Functional reporting may also be introduced making the structure more complicated.
Test your understanding 2
Input
Output
Direct
• •
•
Indirect •
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Direct supervision
Targets based on KPIs
Planning processes Culture
Selfcontrol by individuals
Test your understanding 3
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Test your understanding 4 Accountancy services are often outsourced in smaller companies, but it could be argued that they are critical to the performance of the organisation and may well drive the future of the company. Also there should be some managerial control of this key area.
Test your understanding 5 For example, the organisation might be interested in ensuring that its IS/IT function remains dynamic, and responds to changes in IT technology and changes in its information systems requirements. The external supplier, on the other hand, might be more interested in stability and minimal change, in order to keep costs under control and avoid the risks that inevitably arise with system changes and upgrades.
Test your understanding 6 The idea of the virtual organisation emphasises:
• • • • • •
the decentralisation of control the creation of more flexible patterns of working a greater empowerment of the workforce the displacement of hierarchy by teamworking the development of a greater sense of collective responsibility the creation of more collaborative relationships among coworkers.
A key element in supporting the transformation is IT.
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This is mainly through the systems that facilitate coordination and communication, decisionmaking and the sharing of knowledge, skills and resources.
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Information systems can reduce the number of levels in an organisation by providing managers with information to manage and control larger numbers of workers spread over greater distances and by giving lowerlevel employees more decisionmaking authority. It is no longer necessary for these employees to work standard hours every day, nor work in an office or even the same country as their manager.
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With the emergence of global networks, team members can collaborate closely even from distant locations. Information technology permits tight coordination of geographically dispersed workers across time zones and cultures.
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Different companies can join together to provide goods and services.
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Business process change Chapter learning objectives Upon completion of this chapter you will be able to:
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explain, for a given organisation, the part business process design can play/did play in an organisation’s strategy
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apply Harmon’s processstrategy matrix to a given organisation
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recommend a business process redesign methodology for an organisation
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evaluate the effectiveness of a current organisational process
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analyse information system requirements
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describe the relationship between business process redesign and generic software solutions.
explain the commoditisation of business processes and the role of outsourcing
select, from a range of process redesign patterns, feasible options for improving an organisation’s processes assess the advantages and disadvantages of package software describe how generic solutions can be selected, evaluated and implemented
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1 The role of process and process change initiatives What is a business process?
At its most generic, a business process is any set of activities performed by a business that is initiated by an event, transforms information, materials or business commitments, and produces an output.
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Value chains and largescale business processes produce outputs that are valued by external customers.
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Other processes generate outputs that are valued by ‘internal’ customers and other users.
Processes typically: –
have customers, internal and external
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are independent of formal organisational structure
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may cross organisational boundaries
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should be linked to strategic objectives
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exist in a hierarchy.
Organisations rely on a range of core and support processes to create value for their customers.
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Strategic business processes, such as new product design or high sensitivity customer care, provide unique and durable business advantages to organisations.
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Those processes that depend on people’s intelligence, experience, knowledge, judgement and creativity are the hardest for rivals to duplicate.
Business process design and strategy A business strategy defines:
• • •
how a company will compete what its goals will be what policies it will support to achieve those goals.
Every organisation wants to improve the way it does business:
• •
to produce things more efficiently to make greater profits.
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Illustration 1 – Henry Ford Illustration – The role of process and change initiatives In 1903 Henry Ford started the Ford Motor Company. He encouraged simplification, time studies and experimentation to identify the best way to perform a task. By organising the process as he did, Ford was able to sell cars at a modest price and pay his workers more than any other car workers. Ford’s success is a great example of the power of business process change to revolutionise the economics of an industry.
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Harmon’s processstrategy matrix According to Paul Harmon a processstrategy matrix is a matrix formed by an estimate of:
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the strategic importance of a process on the horizontal axis
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the process complexity and dynamics on the vertical axis.
Assuming that ‘low’ is positioned at the bottom left corner:
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processes that fall in the lowerleft are of little complexity, do not change very often and do not have much strategic importance. They should be automated if possible and given the minimum resources necessary for efficient functioning
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processes that lie at the upperright are complex, dynamic and of high strategic importance. These are usually the processes that provide the organisation with its competitive advantage and should be nurtured accordingly.
Illustration 2 – The role of process and change initiatives Applying Harmon’s processstrategy matrix to a children’s bicycle manufacturer – Wheelies Co. The management at Wheelies have identified the processes that need to be done.
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New product design. Negotiating partnership deals with other organisations. Online purchasing. Stock control. Credit card approval. Bicycle assembly.
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Delivery – international. Funds investment.
Now they need to place them on the matrix by deciding how important and how complex the processes are:
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New product designs and negotiating partnership deals are really important and complex – these are the likely candidates for analysing and redesigning.
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Bicycle assembly is not quite as important – a six sigma improvement effort might be introduced to ensure the process is as consistent as possible.
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Online purchasing is important but routine – this process can be automated quickly and efficiently using offtheshelf software.
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Stock control and credit card approval are both important but routine and well understood – these processes can be automated quickly and efficiently using offtheshelf software.
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International delivery is complex but does not add much value and funds investment is important but no one in the company has any expertise in that field – outsourcing these processes is a popular solution.
The commoditisation of business processes and outsourcing While there is an ongoing trend towards outsourcing in many areas, most organisations view processes as an inhouse activity. This has been for a number of reasons.
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There is a perceived lack of comparability between the firm’s processes and the competences of outside suppliers.
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A lack of standardisation of processes making it difficult to assess whether the process will be improved by outsourcing.
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The high perceived costs of outsourcing compared to the difficult to assess benefits.
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Business process change However, this situation is changing and many would point to the CMM model as a way of standardising software development processes. As standardisation increases:
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it will be easier to assess the costs and benefits of the outsourcing decision
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it will be easier to compare suppliers outsourced processes will become like other commodities with the resulting drop in prices.
Note: A realted issue, the use of generic software solutions to aid business process redesign, is explored in greater depth later in this chapter.
Illustration 3 – Business Process Outsourcing Business process outsourcing (BPO) to date has focused on the following areas:
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finance and accounting payroll HR administration training procurement administration and supply chain management customer contact information and content management special industryrelated processes in areas such as banking and insurance.
Note: these have usually involved offshore provision to cut costs.
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Test your understanding 1
Assess which of the following processes is most suitable for outsourcing.
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Environmental reporting. Processing online customers’ credit card purchases. Customer queries and complaints.
2 Improving the processes of an organisation Process redesign, often called Business Process Reengineering (BPR), Business Process Management (BPM) or Business Process Improvement (BPI) takes a ‘clean sheet’ approach to the process, which is usually either broken, or so slow that it is no longer competitive in delivering the company’s value to its customer.
Business process redesign methodology Harmon recommends a fivestage generic business process redesign methodology:
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Business process change Major redesign projects are usually managed by a steering committee and undertaken by a team that represents all the functional managers involved in the change. Other key aspects of project management covered later in the syllabus will also be relevant here. 1 Planning a process redesign effort
2 Analysis of an existing process
3 Design of a new or improved process
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Identify goals
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Document workflow
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Explore alternatives and choose best redesign to achieve goals
4 Development of resources • for an improved process
Define scope Identify personnel Develop plan and schedule
Identify problems Devise a general plan for the redesign
Make products better, easier to manufacture and maintain
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Redesign managerial and supervisory jobs and develop measurement system to monitor new process
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Redesign jobs, work environment and incentive systems; develop training; hire new employees if necessary
5 Managing the • implementation of the new • process
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Integrate and test Train employees, arrange management Maintain process and modify as needed
Range of process redesign patterns A process redesign pattern is an approach or solution that has often worked in the past. There are several patterns that have proved popular in redesign efforts. For example:
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Reengineering – start with a clean sheet of paper and question all assumptions.
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Valueadded analysis – try to eliminate all nonvalueadding activities. Porter’s value chain model covered in chapter 3 may be particularly useful here.
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Simplification – try to simplify the flow of the process, eliminating duplication and redundancy.
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Gaps and disconnects – a process redesign pattern that focuses on checking the handoffs between departments and functional groups in order to assure that flows across departmental lines are smooth and effective.
Illustration 4 – Business Process Redesign Going back to our bicycle manufacturer – Wheelies Co. – we can show a manufacturing process that starts with three pieces of metal, two of which are welded together and then joined with the third:
It is clear that there is potential redundancy in the raw material inspection. If the receiver were to inspect the raw material before sending it on to the welder or joiner, then they could concentrate on their main activities – welding and joining:
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Process redesign and strategy If we consider a topdown approach to strategic planning, then the goals and measures are laid out by the senior managers as the organisation’s strategy.
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Each department or group is assigned only a portion of the corporate goals.
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As the goals are delegated they become narrower and the measures associated with them become more specific.
From the value chain a process is divided into sub processes and subsub processes and eventually into specific activities.
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Ideally, one or more measures for each activity are established. The measurements determine if the process is working.
When we analyse a process or redesign a process we ask:
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what the activity is contributing to the overall sub process or value chain to which it belongs?
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how can we determine whether the activity is actually achieving its purpose?
Norton and Kaplan’s Balanced Scorecard approach represents a major effort to link strategies to specific measures and discourage an undue emphasis on financial measures. They suggest that strategy is formulated from four different perspectives.
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Financial. Customers. Internal business processes. Innovation and learning.
Under each of these headings analysis looks at the critical success factors required and corresponding key performance indicators. Linking process measures to these CSFs and KPIs should ensure a strategic emphasis. In many cases the process redesign becomes a trigger for emergent strategies as new competences and CSFs are identified and/or developed.
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3 Software solutions Establishing business information needs Various methods are available for establishing business information needs, including the following: Technique
Suitability
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Interviewing
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Standard technique for most scenarios
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Written questions
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Where people are not available for interview
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Questionnaires
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Where the user population is too large to interview
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Generally unsuitable due to superficial nature of questions and lack of interaction.
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Observation
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Particularly useful if carried out before interviewing
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Document analysis of existing processes
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Good source of design and analysis material.
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Workshops
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Protocol analysis – a mixture of interview and observation
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Ensures all aspects of the process are considered and none ‘taken for granted’ by users.
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Prototyping
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Where requirements are unclear Helps users reassess their desired functionality
Note: the ‘V model’ covered later in the syllabus is also relevant here.
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Business process change Using generic software solutions There are various ways to produce a software solution.
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Purchase a standard (‘generic’) software package and: – use this without any modification –
make suitable amendments to customise this for the organisation’s specific requirements
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add company specific modules as necessary.
Pay for a bespoke system to be developed using existing hardware.
In this section we focus on the use of generic solutions. Advantages
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Disadvantages
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They are generally cheaper • to buy than bespoke packages are to develop.
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They are likely to be available almost immediately.
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Any system bugs should have been discovered by the vendors before sale.
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Good packages are likely to • come with good training programs and excellent documentation and on screen help facilities. •
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New updated versions of the software are likely to be available on a regular basis.
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The experience of a great number of users with similar needs to those in the organisation has been incorporated into the design of the package.
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Different packages will be available for different operating systems or data structures.
They do not fit precisely the needs of the organisation – the users may need to compromise what they want with what is available. The organisation is dependent upon an outside supplier for the maintenance of the software; many software suppliers are larger than most of their customers, and are therefore difficult to influence. Different packages used by the organisation may have incompatible data structures. Using the same packages as rival organisations removes the opportunity of using IS for competitive advantage.
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chapter 9 Application packages can be altered and tailored to a buyer’s requirements, but amendments to an existing package have to be paid for, and so add to the purchase cost of the software. In addition, an altered package may not accept the standard updates provided by the supplier.
Evaluating and selecting a generic software solution The selection process
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Produce a requirements listing and send this with an invitation to tender to a number of suppliers.
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Review the tender documents and make an initial selection of, say, three software packages.
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Obtain copies of those packages and test on the organisation’s own computer system. Alternatively, the supplier may be asked to make a presentation to show why the purchasing company should use their particular package.
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Obtain user input and evaluation of each package.
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Test the package with test data from the organisation, paying particular reference to unusual items.
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Provide a final purchase recommendation, taking into account other factors such as aftersales service.
Obtain technical input and evaluation of each package to ensure it is compatible where applicable with existing hardware and software and provides the necessary processing capability.
Selection criteria In evaluating different options, both the software and the supplier need to be assessed. Key factors are thus: Software
Supplier
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Meeting user requirements Interface design
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Controls
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Support and maintenance
Costs
Updates
Length of time in business Financial stability Third party references Availability of demonstration copies of software Ethical issues – e.g. are they a good global citizen?
User manuals Compatibility with existing hardware and software
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Business process change The above factors are then weighted to achieve a single score for each option.
Illustration 5 – Software solutions Illustration – Software solutions A small organisation wishes to computerise the production of their accounts. They run two separate companies, each with their own accounts staff but under the control of the group financial manager. They do not wish to change the way that they operate, so they need a system that can be networked over three computers, one for each company and a third for the group financial manager. Each company’s accounts staff are responsible for the daytoday running of their business, while the group financial manager is responsible for producing consolidated accounts for the two businesses and for the management accounting function. The accounts for each of the two companies must be kept confidential. The organisation makes out a list of factors that are important to them, allocating appropriate weights. Factor Ability to provide all basic accounting functions required Networking capability User friendliness Cost Management accounts capability Hot line support Security features After sales service
Weight Essential Essential 8 10 6 2 8 4
A shortlist of four accounts packages is drawn up. The packages are called A, B, C and D. Each of these is scored against the factors described above.
Factor 1. All basic functions supplied 2. Networking capability 3. User friendliness 4. Cost (higher score = cheaper) 5. Management accounts capability 6. Hot line support/training 7. Security features 8. Aftersales service 190
Supplier scores A B C D Yes Yes Yes Yes No Yes Yes Yes 7 9 10 8 10 2 2 4 3 10 8 6 0 5 6 10 6 10 7 8 0 6 8 10 KAPLAN PUBLISHING
chapter 9 Solution The first thing to note is that A does not satisfy the essential requirement of being able to be networked. Although it is by far the cheapest package, it is not a satisfactory solution to the organisation’s needs, and is not considered further. The scores for cost are corrected to 5 (B), 5 (C) and 10 (D). Factors 1 and 2 are satisfied equally well by all three packages and do not need to be considered further. The amended table is as follows: Factor 3 4 5 6 7 8
Weight 8 10 6 2 8 4
B 9 5 10 5 10 6
C 10 5 8 6 7 8
D 8 10 6 10 8 10
The total scores for each supplier are calculated by crossmultiplying the factor weights by the appropriate scores. B Total score = (8 × 9) + (10 × 5) + (6 × 10) + (2 × 5) + (8 × 10) + (4 × 6) = 72 + 50 + 60 + 10 + 80 + 24 = 296 C Total score = (8 × 10) + (10 × 5) + (6 × 8) + (2 × 6) + (8 × 7) + (4 × 8) = 80 + 50 +48 + 12 + 56 + 32 = 278 D Total score = (8 × 8) + (10 × 10 ) + (6 × 6) + (2 × 10) + (8 × 8) + (4 × 10) = 64 + 100 + 36 + 20 + 64 + 40 = 324 It can be seen that D is the package that should be selected.
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Implementation
Data migration It is vital to consider the stages that will be addressed during the migration process. Some of the stages include:
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Planning – the organisation may need to create a Steering Committee that has representatives from a number of areas of the organisation including payroll, personnel, etc.; they may be from various levels, e.g. operational, tactical and strategic.
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Data mapping – this is the stage when the data is moved from one system into the field heading and file structures of the new system. An evaluation will need to take place of the structures within the new system and the existing computer system to ensure that the allocation for field headings is consistent.
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Manual input – there may be a requirement to enter some of the data manually from the old format to the new. This will require the organisation to consider the method of manual input as there are many issues with this type of transfer such as the type of input method, e.g. keyboard or scanner. The use of a keyboard, for example, greatly increases the chances of transposition errors that will reduce the quality of the input made.
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Testing the solution – there will need to be a period of testing after the conversion process to ensure that all of the data is accurate and that the system is running properly. A test environment will have to be created by the team to ensure that all the outputs from the tests made are accurate; this may include test plans and scripts for the conversion software.
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Implementing the solution – once the file conversion has been tested and accepted it can be run on the live data. Procedures will have to be specified to test that records are accurately converted.
Training Training and a strategy for training are crucial. In order for this to be successful and resources not to be wasted it is vital that there is clarity about a number of issues. These are:
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Who needs to be trained and why. Whether training takes place on or off the job. Who will provide the training. If training should occur in a short period or be ongoing. What the line management involvement will be.
The chosen approach will depend on organisational structure, company policy and ethos. However, it is important that the approach is clear to the users. The nature of training that users will require will vary dependent upon:
• • • •
User backgrounds. Purposes of the system. Features of the system. The kind of user interfaces – menus, graphics, speech, etc.
Methods of training A number of alternative training methods are available to the organisation, but the most important factor to consider is that the type of training used is matched to the level of experience of the user. For example, it would not help an inexperienced user to be presented with a manual; to ensure success the user would need to receive firsthand information, probably in the form of a taught course. This will also help to improve the acceptance of the new system by the users.
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External courses – this is when the users go to the providers’ premises to enable them to obtain the knowledge and the skills to use the new information system.
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Internal courses – the organisation runs a course inhouse relating to the use of the information system. The course can be conducted by the internal training or IS department or an external provider may come into the company to teach the course.
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Computerbased training – as an alternative the staff may be trained using a software tutorial that is often supplied with the original software purchase. The tutorial can be quickly installed onto the PC.
Changeover techniques • Parallel running This is when the new and the old system run side by side for a period of time, e.g. several weeks, until the analyst is satisfied with the operations of the new information system. It is known as the highcost lowrisk approach.
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Direct changeover This approach is when the old system immediately finishes and the new takes over; confidence will be high in the new information system. For example, the old finishes at 8.59.59 seconds and the new starts at 9.00.00 seconds. It is known as the highrisk lowcost approach.
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Phased This is when the new information system can be introduced part by part or stage by stage. This may be useful if the organisation is implementing an information system in a number of departments, as it will help to limit the impacts of the new system. It must be remembered that the phase can be either direct or parallel in each of the stages.
Test your understanding 2
You are responsible for implementing a payroll system for weekly paid employees, using a boughtin package on a standalone microcomputer system. There are 3,000 records (one for each employee) in the current manual system. Each record is held on a card. The information about each employee comprises personal details (personnel number, name, date of birth, grade, section, rate of pay, allowances, deductions from pay, etc.), held in the top section of the card. In the body of the card are held a series of line entries, one for each week of the year. As each week is worked the details are entered in the appropriate line: gross pay; tax and national insurance, by reference to the relevant tables; and net pay. (a) Describe a procedure for transferring data from the manual to the computer to create the master file prior to going live on the new system. 194
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Generic software solutions and business process redesign Competitive advantage Firms seek to redesign processes to increase their competitive edge. By using generic software packages they may be able to match the best practice of competitors who also use the software, but are less likely to outperform them. Note: that there is a tension in the academic texts between those who believe that software packages define best practise (e.g. Davenport) and others (e.g. Harmon) who feel they represent average practise. Planning The above discussion gives the impression that firms consider what they want and then look for a software package to help meet those requirements. In reality the sequence can be reversed where managers are presented with new software and then explore the possibilities for process redesign. ERP – driven redesign Software vendors like SAP, Peoplesoft and Oracle have developed modules to represent what they consider to be best practise for a wide range of business processes. As commented on in section 'Historical initiatives' above, ERPdriven redesign involves using these modules to integrate and redesign potentially diverse processes. Often the order of events is that Oracle, say, develops a new software module that is adopted by organisations that then migrate their existing processes to match the new module. In effect you start with the solution and then modify processes. SAP, the main ERP vendor, provides comprehensive business maps (or ‘process architectures’) for different industries offering a wide range of modules covering the processes involved in that industry. For example, the insurance business map includes modules for claims notification, claims handling, claims accounting, etc. Clients can choose the modules they require and then specify how they wish to link them together and how they wish to control them. The ERP vendor will provide the underlying workflow engine that passes control from one process to the next.
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Illustration 6 – Nestlé USA In 1997 Nestlé SA saw that its decentralised approach was causing problems. Operating companies were functioning independently of each other with little coordination. For example, companies were paying the same vendor 29 different prices for vanilla, with each company having a different coding and name for the vanilla. Nestlé USA took the decision to standardise software systems using five SAP modules – purchasing, financials, sales and distribution, accounts payable and accounts receivable. In addition it would use a SAP supplychain management module. It was found that it was relatively easy to install the SAP modules but much harder to change business processes and to win the acceptance of staff. Despite costing an estimated $200 million on the transition, Nestlé claims that the project has already paid for itself through:
• • •
More accurate forecasting Lower inventory and distribution costs Other supply chain improvements
Jeri Dunn (Vice president and CIO of Nestlé USA) commented that if she had to do it again, she would reorder the project: (1) Focus first on changing business processes (2) Achieve universal buyin (3) Install software This feedback is typical of firms that rely on ERP applications to drive change, seeing them as the solution rather than tools.
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Test your understanding answers
Test your understanding 1 Environmental reporting is likely to be complex and require great specialisation and depth of knowledge so would be difficult to outsource (except to an environmental reporting specialist?) Processing credit card purchases is highvolume and repetitive so would appear to be ideal for outsourcing. However, issues of confidentiality and data security would need to be met first. Dealing with customer queries requires detailed product knowledge, which might be lacking. Also there is a high risk of damaging the firm’s reputation and goodwill if complaints are not handled sensitively. Many firms who used offshore call centres to manage customer queries and complaints in the 1990s have since brought these services back in house.
Test your understanding 2 (a) File conversion takes place during the last stages of systems development. Once the new system is in place then all data has to be transferred onto it. This process can take a considerable time when converting from a manual to a computerised system. The way in which files are converted depends, to some extent, upon their size and complexity. In this case, there are 3,000 records for input onto a standalone microcomputer. Assuming that there is only one input device, presumably a keyboard, the following sequence of events is likely to occur.
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The changeover will be thoroughly planned and a suitable time identified. In the scenario given, it would not be feasible to run any sort of parallel system and as the package being used is a bought in package, then it will have been tried and tested and will be free from ‘bugs’.
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Once a time has been chosen it is necessary to ensure that all the data held within the present system is accurate and up to date. Dead records should be removed from the system.
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The records will be in continuous use, therefore they will have to be entered in batches. Alternatively, all the cards could be photocopied and then entered onto the system.
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Initially, only the static data will be entered on the computer. This includes such data as name, address, personnel record number, etc. A record will be created for each employee containing all his or her personal static data.
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Once the static data has been entered then it will be a relatively easier task to enter the uptodate variable information. This method avoids data becoming out of date before the system is in operation.
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Once all the data has been transferred to the computer, tests will be carried out using test data to ensure that the system is working correctly.
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Hard copies of all records would be printed out in order for employees to verify their record and also in order to comply with the terms of relevant Data Protection legislation.
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Amendments will be necessary from time to time, as in the case of changes in tax tables and national insurance rates. However, there should be standard programs within the package to facilitate amendment.
(b) Controls that would be incorporated into the process to ensure that the computerised master file is accurate, complete, up to date and suitable for running the live system would include the following.
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The controls exercised to check the completeness and accuracy of the existing manual system.
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The controls over the total number of records and the values imposed on certain key fields. Data entry should be controlled by use of a batch register to ensure that all records have been entered.
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Data should be validated by input programs to check correctness of input.
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Strict control should be exercised over any rejected records.
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A check should be made by record once the data has been entered and this should be compared with the manual records.
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A full test run should be initiated in order to check the system’s and operator’s accuracy.
Notes and records should be kept of any changes to the manual system prior to conversion.
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The role of information technology Chapter learning objectives Upon completion of this chapter you will be able to:
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describe, with examples, the meaning and use of ebusiness
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analyse, for a given business, the main elements of both the push and pull models of the supply chain
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describe the relationships between the supply chain, value chain and value network for both productbased and servicebased organisations and discuss the use of IT and eprocurement in managing the supply chain
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analyse the effect of ebusiness (internet and customer extranets) on the relationship with customers
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explain, with examples, what is meant by the term ‘customer relationship management’ and how a suitable software package could support this
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describe the common different buyer behaviours among online customers
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explain the use of emarketing and how its use might affect the marketing mix
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explain the characteristics of the media of emarketing using the ‘6Is’
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explain, with examples, how electronic media can be used to acquire customers, retain customers and to increase income from them
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explain the importance to a business of ebranding.
analyse how ebusiness can be delivered for organisations in general and describe what an organisation needs to deliver e business and how this might help it to deliver a selected strategy
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1 Information technology – the strategic context Business strategy and information strategy This section looks at IT/IS strategy in the context of the strategic planning tools met in earlier chapters. Unlike many other resources, IS/IT evolves very quickly and will often play a large part in determining corporate strategy. On a SWOT analysis IS/IT can appear in any of the four quadrants and the appropriate responses have to be made. For example:
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Strength. A business has a very advanced IS/IT system that allows it to respond flexibly to orders while maintaining a low cost base.
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Weakness. An organisation’s system is in disarray and customers are becoming irritated by its inability to deliver the proper goods on time.
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Opportunity. Set up new internet site that allows customers to buy over the web.
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Threat. A competitor has spent heavily on IS/IT and can offer very high levels of service as a result.
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Illustration 1 – Information technology – the strategic context MP3 sound compression, the internet and fast broadband connections have forced companies like Sony and EMI to reassess their music retailing strategies. Technology is a threat to these companies.
IS/IT and Porter’s five forces To analyse the SWOT factors relating to IS/IT, it can be useful to consider how IS/IT can be used to counter Porter’s five forces so as to help an organisation have a more comfortable existence than some of its competitors.
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Rivalry: Use IT to reduce the effects of tough competition for example, by building strong relationships with customers and lowering costs.
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Threat of new entrants: Sophisticated IT applications are expensive, slow to develop and technically challenging. All of these are barriers to entry.
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Supplier pressure: Use IT to find new suppliers. Use IT to automatically rotate orders between suppliers. Compare prices on the internet.
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Customer pressure: Use IT to improve customer service, for example, by allowing online ordering.
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Threat of substitutes: Use computeraided design and manufacturing to develop new products first.
Expandable text IT/IS and Porter's five forces
IS/IT and Porter’s generic strategies Porter identified three generic strategies for dealing with the competitive forces. The two basic strategies are overall cost leadership and differentiation. The third strategy – a focus strategy – concentrates on a particular segment of a product line or geographical market – a niche. If it is known which strategy an organisation is currently using to promote their products and/or services, it should be possible to define a role for IS to enhance that strategy.
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Overall cost leadership is about competing by offering products or services at low cost and value for money. The emphasis is on cost reduction. For example, driving down inventory levels, with the assistance of IT for supply chain planning and scheduling, can reduce costs. Sales forecasting software that can be fed into manufacturing resources planning applications can be used in shop floor planning and scheduling applications to increase efficiency.
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Differentiation is about showing that your product or service is different from those of your competitors through, e.g. brand image, customer service or design. A way of differentiating may be to make the ordering process as easy and flexible as possible. This can be done by providing online information services to identify the most appropriate product or service, followed up by a simple online ordering process. Where the differentiation is by customisation, CAD (computeraided design) can reduce costs effectively.
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Focus. This strategy concentrates on a niche market, e.g. a particular buyer group, market, geographic area, segment or product line. The opportunities for IS/IT include providing access to customer information, trends and competitors so as to maximise competitive thrust and exclude competitors.
Test your understanding 1
Consider how an estate agent could use IS/IT to improve its competitive position.
The criticality of IT – McFarlan’s grid To assess the criticality of IT to the organisation, McFarlan’s strategic grid can be used to identify the current and future dependence on information systems (IS).
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Illustration 2 – Information technology – the strategic context Many insurance companies used IS/IT in a support role – accounting, sending out premium renewal notices, etc. The industry was very paper based with customers submitting handwritten claims, accident diagrams and police reports. To save costs and give better customer service, many insurance companies now scan in documents so that they are available to call up on screen. Paper files no longer have to be moved around the office, with the potential of being mislaid. The role of IT in insurance companies went from support, to turnaround to strategic.
Forces that drive an organisation round the strategic grid may be internal or external.
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Internal forces will be concerned with matching the potential of information technology to the organisation’s operations and strategy, such as a decision to improve productivity. Porter’s value chain is a good model to identify internal forces.
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External forces will be associated with changes in the competitive environment, such as actions of competitors, suppliers or customers. Porter’s five forces model can be used to provide a framework to discuss areas where information technology and systems can yield competitive advantage. The advantages may be in defending the organisation against the competitive forces or by attacking and influencing them in its favour.
2 EBusiness The meaning and use of ebusiness
Ecommerce is described as ‘all electronically mediated information exchanges between an organisation and its external stakeholders’. An e commerce transaction can be considered from two perspectives.
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‘Buy side’ ecommerce focuses on transactions between a purchasing organisation and its suppliers.
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‘Sell side’ ecommerce focuses on transactions between a purchasing organisation and its customers.
Ebusiness has been defined as the transformation of key business processes through the use of internet technologies.
So, ecommerce is a subset of ebusiness. The most generic description of ecommerce is trading on the internet, buying and selling products and services online.
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The role of information technology Porter suggested three ways in which IS/IT in general can affect the competitive environment and an organisation’s ability to compete. Though these points apply to IS/IT in general, they are particularly important when considering ebusiness.
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New businesses might become possible. For example, auction sites and photoalbum sites.
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The industry structure can be changed. For example, in the music business it can be argued that the large CD publishers have less power because music can be selfpublished on the internet.
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IS/IT can provide an organisation with competitive advantage by providing new ways of operating. For example, airlines save money by encouraging internet bookings.
The categories of ebusiness functions are shown below:
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B2B (business to business). For example, a supermarket IS system automatically placing orders into suppliers’ IS systems.
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B2C (business to consumer). Selling over the internet – books, flights, music, etc.
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C2B (consumer to business). Some internet sites display a selection of suppliers’ offerings from which the user can choose. A model that largely depends on the internet.
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C2C (consumer to consumer). Auction sites, such as ebay, putting consumers in touch with each other. Amazon does the same by offering secondhand books. This model largely depends on the internet.
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The stages of ebusiness The stages of ebusiness can be described as: Stage
Characteristics
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Web presence
Static or dynamic webpages but no transactions are carried out. Would show information about the organisation, products, contact details, FAQs (Frequently Asked Questions). Faster updates are possible than with paperbased information and could be cheaper than paperbased catalogues.
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E commerce
Buying and selling transactions using ecommerce. Might cut out middlemen, but there is probably no fundamental change in the nature of the business.
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Integrated e commerce
Integrated ecommerce. For example, information can be gathered about each customer's buying habits. This can allow the organisation to target customers very precisely and to begin to predict demand.
4
Ebusiness Ebusiness is now fundamental to the business strategy and may well determine the business strategy
This model helps businesses to understand where they are in the process of ebusiness, and this will help them to decide where to go next with further development.
Benefits of ebusiness Most companies employ ebusiness to achieve the following:
• • • • • • •
Cost reduction e.g. lower overheads, cheaper procurement
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The combination of the above should be to enhance the company's competitive advantage
Increased revenue e.g. online sales, better CRM Better information for control e.g. monitoring website sales Increased visibility Enhanced customer service e.g. via extranets Improved marketing e.g. emailing customers with special offers Market penetration e.g. even small suppliers can gain a global presence via the internet
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Illustration 3 – Ebusiness Illustration – Ebusiness Many supermarkets now offer a homedelivery service. Over the internet, inventory lists are displayed on customers who fill an electronic ‘shopping trolley’ and proceed to payment and checkout. A delivery period is chosen (say 4pm–6pm) for the following day. Supermarket staff pick the goods chosen and pack them for delivery. Standard shopping lists can be set up by users to speed up the process. The standard lists can be amended each time (for example, extra milk, but no carrots).
Expandable text
Barriers to ebusiness Barriers to ebusiness can be seen in both the organisation itself and in its suppliers and customers. They include:
• • • • • • •
technophobia. security concerns setup costs. running costs. limited opportunities to exploit ebusiness. limited IT resources in house customers not likely to be interested in ebusiness
Expandable text Barriers to ebusiness
Expandable text The internet, intranets and extranets
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3 Supply chain management (SCM) Many businesses prosper or fail depending on the success of their relationship with their suppliers and with those who they supply. Businesses that rely on other businesses to this extent are in what is called a supply chain – each supplying each other right up to the final link in the chain, the consumer. The internet can help make this relationship work more effectively and efficiently.
About supply chains
A supply chain encompasses all activities and information flows necessary for the transformation of goods from the origin of the raw material to when the product is finally consumed or discarded.
This typically involves distribution of the product from the supplier to the manufacturer to the wholesaler to the retailer and to the final consumer, otherwise known as nodes in the supply chain. It is helpful to make a distinction between upstream and downstream supply chain management. For an Internet retailer, for example, upstream SCM would involve transactions between the firm and its suppliers (equivalent to buyside ecommerce) and downstream, customers (equivalent to sellside ecommerce). The transformation of product from node to node includes activities such as:
• • • • • •
production planning purchasing materials management distribution customer service forecasting.
While each firm can be competitive through improvements to its internal practices, ultimately the ability to do business effectively depends on the efficient functioning of the entire supply chain.
Illustration 4 – Supply chain management (SCM) For example, a wholesaler’s inability to adequately maintain inventory control or respond to sudden changes in demand for stock may mean that a retailer cannot meet final consumer demand. Conversely, poor sales data from retailers may result in inadequate forecasting of manufacturing requirements.
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Push and pull supply chain models In the traditional supply chain model, the raw material suppliers are at one end of the supply chain.
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They are connected to manufacturers and distributors, who are in turn connected to a retailer and the endcustomer.
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Although customers are the source of the profits, they are at the end of the chain in the ‘push’ model.
Driven by ecommerce’s capabilities to empower clients, many companies are moving from the traditional ‘push’ business model, where manufacturers, suppliers, distributors and marketers have most of the power, to a customerdriven ‘pull’ model. This new business model is less productcentric and more directly focused on the individual consumer – a more marketingoriented approach.
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In the pull model, customers use electronic connections to pull whatever they need out of the system.
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Electronic supply chain connectivity gives end customers the opportunity to give direction to suppliers, for example, about the precise specifications of the products they want.
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Ultimately, customers have a direct voice in the functioning of the supply chain.
Ecommerce creates a much more efficient supply chain that benefits both customers and manufacturers. Companies can better serve customer needs, carry fewer inventories, and send products to market more quickly.
Illustration 5 – Supply chain management (SCM) Several personal computer manufacturers allow users to order over the internet and to customise their machines (for example Lenovo and Dell). PCs are then made to customers’ orders.
Test your understanding 2
Describe what is meant by the terms ‘push’ and ‘pull’ supply chains models.
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Porter’s value chain revisited Porter’s value chain was considered in chapter 3 and is reproduced below:
The theory behind the value chain is that somewhere the organisation carries out activities that customers value, are willing to pay for, and that result in profits being made. The activities could be skill and knowhow related, organisational or manufacturing. The traditional value chain has been criticised because it:
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is designed primarily to describe manufacturing businesses does not emphasise the importance of the customer enough. It is product led rather than market led.
Deise proposed an alternative value chain that places more emphasis on the customer:
In terms of this model, ebusiness enables companies to:
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carry out continuous market research as products are ordered and sold
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allow great flexibility and speed of response, provided members of the upstream supply chain (suppliers) also embrace ebusiness.
use the results of continuous monitoring to order goods, design new products and design special offers
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The role of information technology Note the last point carefully: the whole supply chain must be flexible and efficient if any one member of it is to benefit from better market information. There’s no point one company knowing what its customers want if its suppliers and distributors cannot respond adequately.
Illustration 6 – Supply chain management (SCM) In the supply chain shown, ABC Manufacturing Ltd must be responsive to its customers. Direct supplier 1 and Direct supplier 2 must be responsive to ABC Manufacturing Ltd, and Indirect supplier 1 must be responsive to Direct supplier 2.
Obviously, if ebusiness capability is present in all members of the supply chain, Deise’s model of the value chain is becoming more feasible: selling, delivering, ordering, designing and manufacturing can all be linked electronically permitting:
• • • • •
cost savings time savings faster innovation better marketing better quality.
Test your understanding 3
What is Deise’s model of the value chain?
4 Upstream SCM The key activities of upstream SCM are procurement and upstream logistics. A good example of how the upstream supply chain can be improved using IT is Tescos:
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Illustration 7 – Upstream SCM Tescos
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Largest grocery retailer in the UK A typical store stocks 50,000 products Over 2,000 suppliers, each of which will supply at most 200 products
Date Objective
Solution
Comments
1980s Streamlining store Goods ordered replenishment via Electronic Data Interchange (EDI) 1989 Help suppliers forecast demand
Suppliers sent EDI messages
Suppliers receive messages detailing Actual store sales Depot stockholdings Tesco’s forecasts
1997 Better twoway collaboration Shift responsibilityfor managing products to suppliers 1999 More effective promotions
Tesco Information Suppliers can monitor Exchange (Tie) actual sales in real time allowing suppliers (almost!), allowing them to view EPOS to identify changes in data demand (by product, store and region) and react accordingly. Promotions management module added
Suppliers are involved in planning and executing promotions
What is eprocurement? The term ‘procurement’ covers all the activities needed to obtain items from a supplier: the whole purchases cycle.
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Identifying when items are needed, how many are needed and gaining authority to acquire them.
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Finding suitable suppliers. Choosing which supplier to order from.
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• • • • •
Agreeing the price or perhaps a range of prices depending on volumes.
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Storing of goods.
Ordering the goods with the chosen supplier(s). Receiving goods into the organisation. Checking the goods are as ordered and handling queries. Recording the goods in inventory or the fixed asset register as appropriate. Receiving, checking and processing the supplier’s invoice. Paying the supplier according to cash flow/cash discount priorities.
The more of the procurement process that can be automated, the better as there will be considerable financial benefits.
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Labour costs will be greatly reduced. Inventory holding costs will be reduced. Not only should overstocking be less likely, but if orders are cheap to place and process, they can be placed much more frequently, so average inventories can be lower.
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Production and sales should be higher as there will be fewer stockouts because of more accurate monitoring of demand and greater ordering accuracy. The benefits of eprocurement The more of the procurement process that can be automated, the better as there will be considerable financial benefits.
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Labour costs will be greatly reduced.
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Production and sales should be higher as there will be fewer stockouts because of more accurate monitoring of demand and greater ordering accuracy.
Inventory holding costs will be reduced. Not only should overstocking be less likely, but if orders are cheap to place and process, they can be placed much more frequently, so average inventories can be lower.
Other benefits include the following:
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The firm may benefit from a much wider choice of suppliers rather than relying on local ones.
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Greater financial transparancy and accountability Greater control over inventories Quicker ordering, making it easier to operate lean or JiT manufacturing systems
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There are also considerable benefits to the suppliers concerned, such as reduced ordering costs, reduced paperwork and improred cash flow, that should strngthen the relationship between the firm and its suppliers.
Expandable text Esourcing, epurchasing and epayment
Potential risks of eprocurement There are some risks associated with eprocurement. These are:
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technology risks. There is a risk that the system (whether software or hardware) will not function correctly. There are risks that it might not interface properly with the organisation’s system. There are very high risks that it will not communicate properly with a wide range of supplier systems
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organisational risks. Staff might be reluctant to accept the new procurement methods
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no cost savings realised. As with all IS/IT projects, it is very difficult to predict all the benefits that can arise. Tangible benefits (such as might arise if fewer staff have to be employed) are relatively easy to forecast. However, intangible benefits (such as better customer service giving rise to an improved reputation) are very difficult to estimate with any accuracy.
Test your understanding 4
What are the main processes that can be covered by the term e procurement?
Restructuring the supply chain In chapter 6 we looked at strategic choices of outsourcing, vertical integration and strategic alliances, where the key issues of cost, quality and control were highlighted. These are still relevant for online businesses as much as for conventional ‘bricks and mortar’ organisations. All organisations must decide between:
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vertical integration – manufacturing inhouse
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virtual disintegration (disaggregation) – in between these two extremes.
virtual integration – the majority of supply chain activities are undertaken by third parties
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The role of information technology However, Internet technology allows more efficient and cheaper communications within the chosen structure and may make virtual integration preferred to vertical integration.
5 Downstream SCM Examples of how ebusiness affects relationships with customers The following are the main ways in which ebusiness can affect an organisation’s relationship with its customers.
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Tiein/switching costs. A good ebusiness arrangement can make customers reluctant to switch supplier. For example, time and effort might have gone into automating most of a customer’s purchase transactions. If this works well, not only would customers not want to switch away from an efficient process, but there would be expense and disruption if they did.
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Ecommerce can lead to disintermediation. In this process intermediate organisations (middlemen) can be taken out of the supply chain.
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The process of reintermediation is also found, i.e. new intermediaries are introduced to the value chain, or at least to some aspects of it.
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Countermediation is where established firms create their own new intermediaries to compete with established intermediaries.
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Continual updates – products, prices, news.
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Tracking customer internet activity and buyer habits. Every click on a website can be recorded and analysed.
• •
Customer preferences can be acted on.
Easy, fast, cheap, twoway communication. User communities. The users of some complex products, such as software, set up user communities where members help each other and where pressure on the product supplier can be organised. Strong user communities are valued by their members and the organisation would be wise to look at the comments and queries on the bulletin boards.
Customers can specify precisely the features they might want in their product.
Illustration 8 – Downstream SCM An example of disintermediation is seen in the travel industry where travel agents have been cut out of many transactions as the public can book directly with hotels, airlines and rail companies.
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chapter 10 The travel industry also gives an example of reintermediation. Companies like lastminute.com and expedia.com are like new travel agents, presenting a wide choice of products and services. An example of countermediation is Opodo.com, set up by a collaboration of European airlines to encourage customers to book flights directly with them rather than using costcomparison intermediaries such as lastminute.com.
Test your understanding 5
What is meant by the term ‘disintermediation’?
Emarketing: the 7Ps Emarketing is marketing carried out using electronic technology. A number of techniques and technologies can be used:
Opportunities for emarketing can be examined using the traditional 4Ps of product, price, promotion and place, plus an additional 3Ps – people/participants, processes, physical evidence. The additional 3Ps are particularly relevant to the marketing of services.
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Here are examples of the effects of electronic methods on marketing: Product
Price
Promotion
Place
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Retailers often offer a wider range of products through online websites compared with traditional catalogues
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Customisation. e.g. Holidays no longer have to be for the precise seven days a tour company dictates. Note the Lenovo computer example cited earlier.
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Many companies use the internet to vary the extended product. e.g. online assistance
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Prices can be lower because of ebusiness techniques automating processing.
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From customers' perspectives, prices are easy to compare on the internet (greater transparancy) so there is more pressure on retailers to be competitive
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Prices can be changed to reflect demand e.g. car rental firms in the USA will continually monitor demand and rival's prices and change their prices accordingly. This is known as "dynamic pricing".
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New pricing approaches become feasible, such as auctions.
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Websites,
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emails (but not spam we hope!).
• • •
Disintermediation, reintermediation, countermediation
People/ • participants
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Search engine results (influenced by search engine marketing see customer acquisition below under CRM)
Direct sales (manufacturer–consumer), Delivery over the internet (e.g. music, software, video) Service businesses usually have high persontoperson contact. It is important that these contacts are conducted well as there is often no quality control step that can intervene between employee and customer. A simple example of the use of electronics is to provide employees with an onscreen script for dealing with queries. Depending on customers’ answers, the script branches to different options.
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Physical evidence
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Again, in a service business, a customer is often exposed to more business processes. For example, a lot of information has to be provided if a customer is buying online insurance. The process has to be made high quality and easy to use.
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Many people become frustrated with ecommerce sites because a small error is only reported at the end of the process, and then the customer has to start from the beginning again.
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Is the website well designed? Does it look good? The website frequently gives potential customers their first impressions of the organisation.
Emarketing: the 6Is The 6Is of marketing is a summary of the differences between the new media and traditional media. By considering each of these aspects of the new media, marketing managers can develop plans to accommodate the characteristics of the new media.
Interactivity
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Traditional media are mainly ‘push’ media – the marketing message is broadcast from company to customer – with limited interaction.
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On the internet it is usually a customer who seeks information on a web – it is a ‘pull’ mechanism.
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The internet can be used as a lowcost method of collecting marketing information about customer perceptions of products and services.
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The website also records information every time a user clicks on a link. Log file analysers will identify the type of promotions or products customers are responding to and how patterns vary over time.
Individualisation •
•
Integration
Communications can be tailored to the individual, unlike traditional media where the same message is broadcast to everyone. Personalisation is an important aspect of CRM and mass customisation, e.g. every customer who visits a particular site is profiled so that when they next visit information relevant to their product, interest will be displayed.
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The internet can be used as an integrated communications tool, e.g. it enables customers to respond to offers and promotions publicised in other media;
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It can have a direct response or call back facility built in;
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It can be used to support the buying decision, even if the purchase does not go through the internet – with webspecific phone numbers on websites.
Industry structure •
The relationship between a company and its channel partners can be dramatically altered by the opportunities available on the internet. For example, disintermediation and reintermediation.
Independence of • location
Electronic media gives the possibility of communicating globally – giving opportunitiesof selling into markets that may not have been previously accessible.
Illustration 9 – Downstream SCM The Amazon.com (or Amazon.co.uk) site provides the following facilities, all of which can be linked to marketing and customer service, and that help Amazon to acquire customers, retain customers and increase income from them.
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Customers can write reviews and read other people’s reviews of products (promotion, interactivity).
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Based on previous buying habits, products are recommended (intelligence, promotion, individualisation).
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‘Customers who bought this product also bought these products…’ (intelligence, promotion).
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Order tracking (integration).
• • •
Very smartlooking interface (physical evidence).
Prices of new and used items are displayed. Prices of new items are usually lower than conventional shops (price). Search facilities (interactivity, promotion). Emails if orders are delayed (processes, individualisation).
Test your understanding 6
What are the 6Is of emarketing?
Ebranding A brand is a name, symbol, term, mark or design that enables customers to identify and distinguish the products of one supplier from those offered by competitors. Ebranding has become more and more important as companies decide to offer their services and products online. Website design, corporate branding, ecommerce and search engine optimisation are critical components in building a company’s ebranding. Organisations have three choices about how to handle ebranding.
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Carry out exactly the same branding on the website as in other places. The organisation has to be careful to ensure that thewebsite style, quality and commercial offers are consistent with the existing brand.
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Offer a slightly amended product or service, still connected to the original brand. The slight differentiation is often signalled by putting the word ‘Online’ after the original brand name. For example ‘Timesonline.co.uk’. This site describes itself as ‘The best of The Times and The Sunday Times in real time’. So the products are slightly different from the paperbased products, so are differentiated but still strongly linked. The ‘online’ description also promises interactivity and might suggest a free service.
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Form a partnership with an existing brand.
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Create an entirely new brand, perhaps to emphasise a more modern, flexible approach. This has been common with financial institutions such as HBOS and IF. HBOS runs a conventional banking operation and IF is its direct finance operations that makes high use of the internet.
Illustration 10 – Downstream SCM Aspirin’s landbased brand positioning statement was ‘Aspirin – provides instant pain relief’. This does not hold true for a meaningful web presence, you can’t get instant pain relief on the web. So the management utilised their new ebranding creative strategies to develop a website for Aspirin that made sense to a consumer in the disintermediated world of brands on the web. The result was ‘Aspirin – your self help brand’, which offered visitors meaningful healthoriented intelligence and self help, over the web.
Test your understanding 7
Why would an organisation choose a related, but slightly different name for its online operations?
6 Customer relationship management (CRM) Introduction Research into ebusinesses suggests the following.
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It is 2030% more expensive to acquire new online customers than for traditional businesses.
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Retaining an extra 5% of customers can boost online company profits by between 25 and 95%.
The objective of CRM is to increase customer loyalty in order to increase profitability and is thus a key aspect of ebusiness. Definitions
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•
CRM is an approach to building and sustaining longterm business with customers.
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eCRM is the use of digital communications technology to maximise sales to existing customers and encourage continued usage of online services.
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The customer lifecycle CRM involves four key marketing activities (the ‘customer lifecycle’). (1) Customer selection defining what type of customer is being targeted. –
Who are we targeting?
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What is their value?
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Where do we reach them?
(2) Customer acquisition – forming relationships with new customers. –
Need to target the right segments.
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Try to minimise acquisition costs. Methods include traditional off line techniques (e.g. advertising, direct mail) and online techniques (e.g. search engine marketing, online PR, online partnerships, interactive adverts, optin email and viral marketing)
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Service quality is key here.
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Choice of distribution channel also very important.
(3) Customer retention – keeping existing customers. –
Emphasis on understanding customer needs better to ensure better customer satisfaction.
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Use offers to reward extended website usage.
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Ensure ongoing service quality right by focussing on tangibles, reliability, responsiveness, assurance and empathy.
(4) Customer extension (or ‘customer development’) – increasing the range of products bought by the customer. –
"Resell" similar products to previous sales
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"Crosssell" closely related products
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"Upsell" more expensive products
Linked to this is the customer lifecycle segmentation model – as visitors use online services they pass through seven stages: (1) Firsttime visitor (2) Return visitor (3) Newly registered visitor (4) Registered visitor (5) Have made one or more purchases (6) Have purchased before but now inactive (7) Have purchased before and are still active and eresponsive.
Expandable text Customer acquisition
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Expandable text Customer retention
Expandable text Customer extension
Software solutions The issue of using offtheshelf packages for business process redesign was discussed in chapter 9. In particular it was pointed out how vendors, such as SAP, offer modules for many different business processes, including CRM.
Illustration 11 – Customer relationship management (CRM) The online aspects (there are many others) of SAP’s CRM module includes the following features: Emarketing
• • •
Supports customer loyalty processes via the Internet. Personalizes customers’ Web experiences. Generates additional revenue through a website via catalogue management, content management, customer segmentation and personalization.
Ecommerce
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Runs B2B and B2C selling processes on the Internet.
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Streamlines sales and fulfilment with endtoend ordertocash processes.
Enables a full range of online selling processes, including pricing and contracts, interactive selling, web auctions, and selling via partners.
Eservice
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Offers customers an intuitive channel to perform service tasks, from requesting a service visit to logging a complaint or registering a product.
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Enables customers to checking order status, obtain order tracking information, manage accounts and payments, and research and resolve product problems.
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Services complex products that require sophisticated maintenance.
Web channel analytics
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Gains insight into, analyzes, and acts on ebusiness trends.
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Performs analysis of marketing, sales, and service from a Web perspective.
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Tracks Web behaviour to target customers and drive future marketing activities.
Measures and optimizes the success of Web shop and online content.
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7 Chapter summary
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Test your understanding answers
Test your understanding 1 All of the following technologies could help either to save costs or provide enhanced (and differentiated) service.
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Use of digital cameras to photograph property. The images would then be made available over the web.
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Video of properties that can be downloaded and viewed over the web.
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Graphics programs designed to make floor diagrams easy to produce.
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Standard descriptive phrases (‘deceptively large’ or do they mean ‘deceptively small’?) that can be used for property writeups.
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A database of properties, searchable by price, bedrooms, type, area, age, etc.
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Properties linked to an interactive map. A database of recent property prices in the area. Buyer requirements database. Automatic mailing lists to circulate information to buyers. Electronic appointments system. Computerised accounting system used for property management.
Test your understanding 2 In a push supply chain, customers are at the end of the supply chain and products are pushed at them by suppliers. The customers might not be very keen on the products available, but they have to take (or leave) what is offered. If demand for goods goes up, the manufacturers will probably not respond with increased production. In a pull model, the suppliers are at the end of the supply chain but they pull products into the system. If customer demand goes up, more goods will be made and supplied.
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Test your understanding 3 Deise proposed an alternative value chain that places more emphasis on the customer:
Test your understanding 4 Eprocurement can cover the following tasks.
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Identifying when items are needed, how many are needed and gaining authority to acquire them.
• • •
Finding suitable suppliers.
• • • •
Ordering the goods with the chosen supplier(s).
• • •
Storing of goods.
Choosing which supplier to order from. Agreeing the price or perhaps a range of prices dependingon volumes. Receiving goods into the organisation. Checking the goods are as ordered and handling queries. Recording the goods in inventory or the faxed asset registeras appropriate. Receiving, checking and processing the supplier’s invoice. Paying the supplier according to cash flow/cash discount priorities.
Test your understanding 5 ‘Disintermediation’ is the process of removing middlemen from the suppliercustomer relationship.
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Test your understanding 6 Interactivity, intelligence, individualisation, integration, industry structure, independence of location.
Test your understanding 7 The slight differentiation is often signalled by putting the word ‘Online’ after the original brand name. For example, ‘Timesonline.co.uk’. This site describes itself as ‘The best of The Times and The Sunday Times in real time’. So the products are slightly different from the paperbased products, so are differentiated but still strongly linked. Another example is www.dictionary.Cambridge.org, which gives access to Cambridge Dictionaries online.
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Quality Chapter learning objectives Upon completion of this chapter you will be able to:
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define what is meant by quality, quality control, quality assurance and quality management
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explain, using an example, the part that quality can/did play in an organisation’s strategy
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explain what is meant by ‘quality management system’ and ‘quality certification’ and describe their benefits in both a profit seeking and notforprofit context
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using an example, explain the need for and assess the characteristics of quality in computer software and the implications of these characteristics for testing, liability and ownership
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describe, using an example, the use of the V lifecycle model in developing and testing software
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describe, using an example, how the process of computer software development might be improved through the application of the Capability Maturity Model Integration (CMMI) process
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explain, using a general example, the scope, principles and objectives of the Six Sigma approach to quality
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explain, using an example for each, the application of Six Sigma within ebusiness, the value chain and process redesign
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explain the typical team roles required by Six Sigma outline the Six Sigma problemsolving process (DMAIC), including the use of measurement.
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1 What is quality? Defining quality The term quality is difficult to define, because it is subjective and everyone has their own idea of what quality is. However, according to ISO 9000, the family of standards for quality management systems produced by the International Organization for Standardization (ISO), quality ‘refers to all those features of a product (or service) which are required by the customer’. ISO 9000 will be discussed later in this chapter. In this context, quality may include a number of different attributes, such as:
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• • • •
availability – can it be delivered when I want it?
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communication – can I contact the supplier easily and do they ‘speak my language’?
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credibility – do they inspire confidence?
reliability – will it work first time every time? responsiveness – will the supplier be reasonably flexible? competence – do the necessary skills and knowledge exist to perform the service?
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security – are their systems and procedures secure?
Expandable text
Illustration 1 – What is quality? The management of a bank’s call centre that served business customers was concerned to ensure that customer expectations were being met in relation to what they, the customers, perceived to be critical areas. A survey identified two areas of importance to customers (period waiting for calls to be answered and lack of familiarity with the mechanics of key products) where there was a significant gap between customer expectations and reality. After discussion with call centre supervisors it was agreed that staffing at the call centre should be increased and that additional training in bank products should be provided to the call centre staff. Subsequent customer surveys identified material improvements in customer ratings in these two areas.
Why is quality important? The effectiveness of quality management has been shown to be one of the most important characteristics of successful companies. In recent years quality has become the key in determining many organisations’ position in respect of their competitive advantage. Improved quality can increase revenue and reduce costs, since:
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Better quality improves the perceived image of a product or service and makes customers more likely to buy it.
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Higher demand should result in higher sales volume and higher profits.
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Higher quality in manufacturing should result in lower waste and defective rates, which will reduce production costs.
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The need for inspection and testing should be reduced, also reducing costs.
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The volume of customer complaints should fall, and warranty claims should be lower. This will reduce costs.
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Better quality in production should result in shorter processing times and less capital equipment requirements.
Higher volume might also result in lower unit costs, with economies of scale in production and selling.
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Quality control
Quality control is the traditional approach, concerned with ensuring that actual quality, as measured, meets the target or benchmark standards that have been set. It is concerned with maintaining quality standards, rather than improving them and involves:
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establishing quality standards for a product or service
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monitoring actual quality
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procedures for inspecting and checking the quality of boughtin materials, and production output.
establishing procedures and processes that ought to ensure that these quality standards are met in a suitably high number of cases (in other words, quality acceptance standards are established) taking control action in cases where actual quality falls below the standard.
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Quality assurance
Quality assurance is the term used where a supplier guarantees the quality of goods supplied and allows the customer access while the goods are being manufactured. This is usually done through supplier quality assurance (SQA) officers, who control the specification of the goods supplied. Quality assurance may:
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save purchasers’ quality control and production costs as items can be passed unchecked straight to production. This can give large savings in cost and time in flow production, and can facilitate JustinTime (JiT) production
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help companies to identify and remove the causes for poor quality goods before production instead of waiting for the end result
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be particularly useful where extensive subcontracting work is carried out, such as in the motor industry.
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Illustration 2 – What is quality? A government reserves the right to ensure that defence contractors produce to specification, since defective work could mean the failure of a multimillion pound aircraft, loss of trained pilots and possibly ground crew as well as damage to civilian life and property. Likewise, a weapons system failure could have disastrous consequences.
Quality management
Quality management encompasses any activities undertaken by the organisation to ensure that an organisation’s products or services are of the required quality. It includes quality control and assurance activities. Quality management involves:
• • • •
setting clear standards planning how to meet those standards tracking the quality achieved taking action to improve quality where necessary.
Test your understanding 1
Why might quality control inspections be on a sample basis only?
Test your understanding 2
What are the costs of quality and which are controllable by management?
2 Quality and strategy The strategic importance of quality Quality is important to any organisation due to its impact on cost and competitiveness. However, quality may also play a direct part in the strategy of an organisation.
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Organisations may pursue a strategy of differentiation based on quality, whether by providing a better product at the same price as competitors or with a higherquality product at a premium price.
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Quality attributes may be critical success factors in a given market, such as reliability of cars.
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A vital part of strategy development is to identify the customer and what their quality requirements are.
Illustration 3 – Quality and strategy British Airways In 2006 British Airways announced the rollout of an upgraded inflight entertainment system for Club World and firstclass passengers setting a new industry benchmark in the air. Caterpillar Caterpillar has a 48hour parts delivery service, and if this is not achieved anywhere in the world then the customer receives an apology and the part free. The product is also maintained as one that is reliable and does not fail. Thus Caterpillar maintains its market despite being more expensive than its competitors.
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Different approaches to quality management There are many ideologies that have been used in quality processes, including the following:
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W Edwards Deming – the use of statistical process control.
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Joseph Juran – quality is ‘fitness for purpose’ as seen from the point of view of the customer.
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Armand Feigenbaum – quality issues are relevant to all areas of the operation of a business, with systems and processes being designed to reduce the likelihood of suboptimal production.
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Kauro Ishikawa – the use of quality circles and techniques such as the fishbone diagram.
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Genichi Taguchi – developed a mathematical model of loss, measuring costs incurred or profits forgone.
Phil B Crosby – quality is conformance to customer requirements, achieved by prevention not appraisal, with the goal of zero defects.
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Total quality management
Total quality management (TQM) is a philosophy of quality management that originated in Japan in the 1950s. TQM is a system that integrates the quality management efforts of all groups in an organisation and, it is argued, has been a significant factor in Japanese global business success. It has a number of important features.
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Total – means that everyone in the value chain is involved in the process, including employees, customers and suppliers.
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Quality – products and services must meet the customers’ requirements.
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Management – management must be fully committed and encourage everyone else to become quality conscious.
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The basic principle that the cost of preventing mistakes is less than the cost of correcting them once they occur and the cost of lost, potential future sales. The aim should therefore be to get things right first time consistently.
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This contrasts with the ‘traditional’ approach that less than 100% quality is acceptable as the costs of improvement from say 90% to 100% outweigh the benefits.
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Test your understanding 3
How can a company embracing TQM move forward and what is the accountant’s role in this?
3 Quality management systems and quality certification Quality management systems
The term ‘quality management system’ refers to all the activities undertaken in an organisation to ensure that its objectives with regard to product and service quality are met. In the smallest organisations this may not be written down, but in most organisations, it should involve written procedures, instructions and other documentation. Benefits of a welldocumented system, applicable to any type of organisation, are that:
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everyone involved understands their role responsibilities for all activities are clear and identified there is a focus on critical activities, which are not forgotten or ignored
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when quality problems do occur there is a feedback system that enables identification of the cause
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corrective and preventative processes are already established to ensure that necessary and permanent improvements can be made.
Quality standards Quality management systems involve the use of quality standards against which actual performance is monitored. These may be:
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set internally by operations management, for their own particular operation
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external standards set for a particular industry, or for all industries and organisations in general, depending on the nature of the quality item.
Illustration 4 – Quality management systems and certification ISO 9000 – the international standard for quality management systems ISO 9000 is a family of standards and guidelines for quality management systems developed by the International Organization for Standardization. They provide organisations with a model based on best practice in quality management systems and have been implemented by organisations throughout the world, many of whom have been certified as conforming to the standards. The ISO 9000 standards set out eight principles of quality management for organisations to apply:
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customer focus leadership involvement of people process approach a system approach to management continuous improvement a factual approach to decision making mutually beneficial supplier relationships.
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Quality certification Quality certification is the confirmation in writing by an authorised body that an organisation’s quality management systems have been assessed as meeting the requirements of a given standard. Organisations may apply for certification for a number of reasons.
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Customers may require that all suppliers are certified as meeting a particular standard such as ISO 9000.
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Certification signals to customers that the organisation sees quality as important and has systems and processes in place to ensure effective quality management.
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Gaining certification may provide an incentive to improve quality management within the organisation.
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An independent audit of the organisation’s systems may form part of a risk management programme.
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What benefits may an organisation achieve from participating in a quality certification scheme?
4 Quality and computer software The importance of quality software Quality is a key consideration in any software development.
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The specification and production of software, like all human endeavours, can be affected by errors or incompetence.
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However, the costs that can result from errors in software systems can be large in both financial and human terms. Software errors can potentially threaten the financial health of enterprises or the physical health of human beings. For example, in the case of aircraft control systems.
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The disciplines of quality assurance and testing (see over) are employed to ensure the delivery of software systems of known and reproducible quality.
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The aim of all software developers is to produce highquality software. However, what is meant by quality software may vary from developer to developer or between what the user expects from the software and what the developer is prepared to provide.
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The characteristics of quality software Whatever view is taken regarding software quality, the following characteristics will normally apply to it.
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Reasonably bugfree. It is difficult, if not impossible, to ensure that complex software written today is 100% bug free. However, there is an expectation that software will perform its main activities accurately without any errors occurring. Within this context reliability could also include looking at downtime and software crashing.
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Delivered on time. Organisations rely on delivery dates for software, either because their systems need changing or because revised systems are needed to implement specific client services or other objectives. Timely delivery helps organisations to meet their obligations and objectives. If software is delivered ahead of schedule, the service will be perceived to be significantly better.
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Meets initial specification. Software is written to meet a requirements specification. The purchaser of the software will expect that the specification is adhered to when the final product is delivered. Meeting the specification provides good evidence that the software production has been correctly planned with appropriate focus onto user requirements.
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Meets quality control standards. In other words, the software has been written to meet appropriate quality control standards, such as those set by the ISO (International Organization for Standardization). Meeting these standards provides good evidence that the software will be robust and adhere to the initial specification.
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Usability. As well as being able to do what is expected of it, quality software will be easy to use.
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Flexibility. Considerations of quality should include longterm issues such as the potential for expansion.
Illustration 5 – Quality and computer software The actual mix of objectives to be met may vary depending on the software being written and the user groups interested in maintaining quality. For example, accountants may require that quality software is written within budget, while users require that quality software is user friendly, providing an easytounderstand user interface. Whatever the mix of objectives, the software must do the job expected of it, meeting the software specification originally developed.
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The testing process For all bespoke systems, whether written inhouse or externally, and for any offtheshelf packages that have been modified in any way, testing is an integral part of the systems development process. Testing can be broken down into four basic stages:
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Unit testing, can include tracing the progress of sets of data through structure diagrams or program flow charts to see if results are as expected.
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Integration testing, where programs are tested together to ensure integration and compatibility.
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System testing, where the system is tested as a whole, including operating procedures.
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Acceptance testing, where users operate the system with test data.
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RigShot (RS) set up in business five years ago offering hightechnology, quickresponse troubleshooting services to the oil industry, and has enjoyed considerable growth in that period. The company founder recognised early on that the key to the company’s success was a flexible database of employees that could maintain both normal employment records alongside information relating to the various clients and projects that each member of the organisation was involved with. With this in mind the company employed the services of a small software company(Arch Systems – AS) that developed a bespoke solution within six months of RS inception. With the phenomenal growth in RS’s business, there is an urgent need for the introduction of an integrated computerised bookkeeping and accounting package, the development of whichis outside the capability of AS. To this end RS approached Hal Integrators (HI) to provide the necessary software and office infrastructure. Since the existence of RS relies so much on the database developed by AS, it has been agreed among the three parties that AS would modify their software to permit data to be exchanged between the employees database and the new accounting package. This would then permit seamless integration betweenthe new and existing software. KAPLAN PUBLISHING
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Quality AS has accepted the contract to develop this new interface against an agreed Functional Design Specification that defines precisely the conventions by which the data would be exchanged. However, to limit their commercial risk AS has declined to become involved in the project in any other way, as such would only provide a fully tested software module. Which of the four levels of software testing would AS be responsible for?
5 The ‘Vmodel’ The Vmodel The value of testing cannot be underestimated and it is critical that testing is incorporated into the development process and is contained within each stage of the systems development lifecycle. One solution to this problem is the V model as it identifies the relationship between the development and testing phases and ensures that quality assurance and testing take place at the right time. The Vmodel is illustrated below.
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The Vmodel and software quality The V model has a number of benefits regarding software quality:
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it ensures that testing occurs throughout the project life cycle
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it encourages testing early on in the life cycle, when it is generally cheaper to fix errors
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it encourages the idea of specifying test requirements and expected outcomes before carrying out tests
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it provides a basis for specifying who should be responsible for testing (e.g. users perform acceptance testing).
it defines the type of testing required at each stage, specifying what state the deliverable must be in before it can move to the next stage
Test your understanding 6
NationalGeneration (NG) have contracted the building of a power station to BAA International. Having awarded the turn key contract to BAA, a Functional Design Specification (FDS) was written by BAA’s internal software team. This document formalised the system parameters agreed between NG and BAA during the tender negotiations, as well as identifying how they were to be implemented on the specific software and hardware platforms chosen for the project. Following a series of meetings, BAA and NG agreed to a final version of the FDS. This agreement then enabled the software team to produce a further specification (the Configuration Specification – CS) intended for use by the software team to ensure consistency through the development phase of the software. During the handover phase of the project, which of these two specifications was used by the two organisations for acceptance purposes?
6 The Capability Maturity Model Integration (CMMI) process What is CMMI? CMMI is an assessment framework based on best practice in a number of disciplines related to software development:
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CMMI was developed by the Software Engineering Institute at Carnegie Mellon University in the USA.
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It is based on the principle that the quality of a system depends to a great extent on the quality of the processes used to procure, develop and maintain it.
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Disciplines covered include systems analysis, systems design, software engineering and software management.
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CMMI defines five maturity levels for organisations. A rigorous assessment process is used to determine how well the organisation meets the criteria at each level.
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The framework assists organisations in identifying areas that need improvement and developing a plan for moving to a higher level of maturity.
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CMMI can also be used for benchmarking (see chapter 3) between organisations.
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CMMI assessment can be used by organisations acquiring software to assess the ability of suppliers to deliver good quality software.
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Level 1
Level 2
Level 3
Level 4
Level 5
Performed process
Managed process
Defined process
Quantitatively Optimising managed process process
Processes are informal and adhoc, with little organisation
Managed processes are performed processes that are planned and executed in accordance with a defined procedure
A defined process is a managed processthat is tailored from the organisation’s standard guidelines and defined in great detail
A quantitatively managed process is a defined process that is controlled using statistical and other quantitative techniques
Processes are adapted and continuously improved in a systematic way
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Basic project management techniques are used to manage Few individual documented projects procedures are used Problems are not anticipated but resolved as they occur
Effort is put into documentation and standardisation of processes
Quantitative data is collected to measure processes and product quality e.g. using six sigma
Process improvement is integrated across the organisation Projects are often piloted
Success can be repeated
Illustration 6 – The Capability Maturity Model Integration Many software houses in India have achieved level 5 accreditation and refer to this explicitly within their marketing campaigns as a differentiating factor to potential clients.
Some limitations of CMMI While CMMI can provide a useful framework for improving processes, it does have a number of limitations.
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It has rigid requirements and can become bureaucratic. This can present problems, particularly for small organisations.
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CMMI only identifies where process improvements need to be made, not how this should be done.
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It requires documentation to be managed very formally – probably more formally than many large, successful software developers do.
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The CMMI level only gives an indication of whether the organisation is capable of operating at a certain level – not whether it actually will do so for a particular project.
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To give a good indication of the quality of the process for a particular project, the actual group carrying out the work needs to be appraised, rather than the organisation in general.
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7 The Six Sigma approach to quality The objectives of Six Sigma Six Sigma is a quality management programme to achieve ‘six sigma’ levels of quality, derived from TQM.
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It is a performance measurement framework first pioneered by Motorola in the 1980s, which has developed into a system for process improvement.
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Six Sigma has been used by both manufacturing and service businesses.
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Six Sigma can be implemented across the whole business, but in practice it is generally used for individual processes.
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Six Sigma is designed to decrease wastage and improve products and services, leading to greater customer satisfaction and lower costs. Companies implementing Six Sigma report high levels of savings from projects.
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Six Sigma is a datadriven approach, based on statistical measurements of variation from a standard or a norm and the use of quantitative data for processes.
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The aim of the approach is to achieve a reduction in variations and the number of ‘faults’ that go beyond an accepted tolerance limit. The ultimate aim of a Six Sigma project is to reduce the variation in process output so that there are no more than 3.4 defects per million opportunities – the Six Sigma level of performance.
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Performance measures are based on customer requirements. While targets may appear very high at first, it should be remembered that just one defect can result in a lost customer.
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The Six Sigma is a framework that makes use of a range of tools, such as: – Fishbone diagrams –
Process mapping tools from the chapter on business process change
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SWOT analysis from the chapters on strategic analysis
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Pareto analysis.
Test your understanding 8
Give three characteristics that Six Sigma has derived from TQM.
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Key requirements for successful Six Sigma implementation There are a number of key requirements for the implementation of Six Sigma.
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Six Sigma should be focused on the customer and based on the level of performance acceptable to the customer.
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Six Sigma targets for a process should be related to the main drivers of performance.
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To maximise savings, Six Sigma needs to be part of a wider performance management programme that is linked to the strategy of the organisation. It should not be just about doing things better but about doing things differently.
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Senior managers within the organisation have a key role in driving the process.
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Training and education about the process throughout the organisation are essential for success.
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Six Sigma sets a tight target, but accepts some failure – the target is not zero defects.
Note the similarities between sixsigma and the discussion of how to define quality earlier in this chapter.
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Test your understanding 9
What potential problems can you see with the use of Six Sigma in an organisation with which you are familiar?
8 Applications of Six Sigma Six Sigma and ebusiness Ebusiness (discussed in chapter 10) is the application of advanced information technology, especially the use of the internet, to improve performance of business operations. Six Sigma is being used by a number of large companies to improve processes in ebusiness environments.
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Ebusiness and interface with customers have often not been supported by an efficient supply chain – many ebusinesses have experienced problems with poor inventory and supply chain management.
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Companies have established Six Sigma project teams for majore business initiatives, especially to create more efficient supply chains.
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Six Sigma can be applied to any business process including IT service delivery and support.
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It can also be used as a tool to enable the company’s ebusiness strategy by identifying customer needs, designing value propositions and developing appropriate business models.
Illustration 7 – Applications of Six Sigma The implementation of a large project management improvement scheme using Six Sigma in a multinational bank’s IT department saved over $5 million and achieved 95% ontime project delivery.
Six Sigma and the value chain An organisation’s ability to meet targets and to provide value for money products or services will often be dependent on other organisations within the value chain.
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Six Sigma is being used to look beyond the organisation itself and to apply Six Sigma techniques to look at the wider value chain, encompassing all the activities in and around an organisation, such as suppliers.
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The value chain can also be used as a useful framework for Six Sigma teams analysing processes and the different factors that impact on performance.
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9 The Six Sigma problemsolving process (DMAIC) The five steps of the Six Sigma process Once the area to be improved by the use of Six Sigma has been identified, the methodology defines a number of steps in the improvement process. These are:
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D – Define – defining the problem, clarifying the purpose of the project and developing the project plan.
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M – Measure – data collection to quantify the problem, measuring the key processes that are critical to quality.
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A – Analyse – analysis of data to find the root cause of the problem, considering the process itself, materials, environmental factors and the activities of staff involved in the process. The results from the analysis may lead to modifications in the definition of the problem.
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I – Improve – developing solutions and implementing them. C – Control – monitoring changes, and dealing with problems arising. The control process will focus on key performance measures.
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Illustration 8 – Six Sigma problemsolving process (DMAIC) The diagram shows the different stages in the Six Sigma process, and identifies possible outputs from each stage.
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Test your understanding 10
What types of information is likely to be required by an organisation adopting a Six Sigma approach?
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Test your understanding answers
Test your understanding 1 Reasons why quality control inspections might be on a sample basis only are:
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inspection may cause damage or destruction
• • •
inspection may be a hazardous procedure
accuracy may be diminished if inspection is repetitive and for long periods of time handling the products may result in their deterioration lengthy inspection periods may be unwise due to perishability or deterioration rate of goods.
Test your understanding 2 The costs of quality are:
• • • •
prevention costs – these are controllable by management appraisal costs – these are controllable by management internal failure costs external failure costs.
Test your understanding 3 To move forward a company that is embracing TQM needs:
• • • • •
a leadership that inspires an employeeled customer service employees motivated to achieve TQM simplification of work elimination of waste.
The accountant’s role is to provide performance measures that motivate staff to simplify their work and to eliminate waste in all forms including waste time.
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Test your understanding 4 Benefits from adopting a quality certification scheme include.
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Improved marketing by linking to a ‘brand’ or ‘logo’. Helps improve quality within the organisation. Helps to maximise performance. Helps organisations and staff show competency. May attract better staff. Can help develop staff training and development schemes.
Test your understanding 5 All four; AS would start by testing the new software as a module in isolation (Unit testing). They would then ensure that it functioned correctly with the existing database application; however, because of the nature of this application (a small addition to an already well tested and reliable product) it is likely that the Integration and Systems testing would be combined to reduce costs. Finally there would be acceptance tests performed between AS and HI (possibly witnessed by the client RS). The acceptance tests performed above would also serve as the Unit test for the overall project run by HI.
Test your understanding 6 The functional design specification was used for acceptance purposes.
Test your understanding 7 The underlying principle of CMMI is that the quality of a system is in the whole dependent on the quality of its procurement, development and maintenance.
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Test your understanding 8 Six Sigma developed from TQM – shared characteristics include.
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Reduction and elimination of wastage. High targets. Can be used organisationwide or for individual parts.
Test your understanding 9 Answers will vary, but may include.
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Its reliance on data.
• • • • •
Expensive.
Focuses on what is happening not what could have happened. Based on models and assumptions that will need to be modified when applied in the real world. Time consuming. Can become meaningless jargon. Can be bureaucratic. Could be viewed as another management fad.
Test your understanding 10 The types of data likely to be required by an organisation adopting a Six Sigma approach are:
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input data: – delivery data –
• •
quality
process measures output measures: – profit margins –
service levels
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costs
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Project management Chapter learning objectives Upon completion of this chapter you will be able to:
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explain the typical distinguishing features of a project and the constraints of time, money and quality
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describe, for strategic plan, how elements of the strategy can be broken down into a series of projects
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describe the process of identifying, assessing and dealing with risks
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describe the structures and information that have to be in place to successfully initiate a project in organisations in general
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describe the contents and importance of a project plan for organisations in general
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explain, using examples, how process redesign, ebusiness, systems development and quality initiatives can be treated as projects
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describe, for an organisation in general, the implications of projectbased teams, the roles of the main team members (project manager and sponsor) and how they might overcome typical problems preventing the project from being successful
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describe how projects can be monitored with respect to risks, issues, slippage and changes and how appropriate responses can be devised
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describe how projects can be successfully concluded, including the benefits of endproject reviews and benefits realisation
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explain the typical uses of project management software.
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1 Project features and constraints Distinguishing characteristics of a project
A project can be defined simply as an activity, which has a start, middle and end, and consumes resources. It will:
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have a specific objective
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require organisation.
have a defined start and end date (timescale) consume resources (people, equipment and finance) be unique (a onetimeonly configuration of these elements) have cost constraints that must be clearly defined and understood to ensure the project remains viable
A project differs from ‘ordinary work’ that is ongoing and has a mixture of many recurring tasks and more general goals and objectives. An example of a project could be the introduction of new production facilities as the basis of an ongoing strategy of cost leadership. Projects are fundamental to other aspects of the syllabus such as business process change, quality initiatives and IT development.
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Project constraints
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Illustration 1 – Project features and constraints As potential project managers, we need to determine which of our constraints (time, costs or scope/performance) is the most important and which is the least in order to focus our resources in the most effective way. Additionally, when there are problems, we use the least important constraint (weak constraint) to aid in the solution. The most important of the constraints, the driver, is the last to be compromised.
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Project management If scope is driving your project, it will not be successful unless the project completely meets the performance criteria or specifications. You will spend more time or increase the budget rather than sacrifice quality or features. If performance is the weak constraint, you might consider scaling back on features or quality to meet either time or cost constraints. The driver may change during a project. That is part of the dynamics of project management. However, you have to know the initial order of the constraints before you begin the project planning step.
Test your understanding 1
To help when you have problems determining the driver and weak constraint, devise some comparative questions to explore your project and develop a hierarchy of the constraints, e.g. If I had to choose between spending more time on the project or cutting quality, which would I choose?
2 Strategic plans and projects Although some projects may be initiated on an adhoc basis, it is more common for them to be an implementation tool for the strategic plan of the organisation, as shown in the diagram on following page.
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3 Project risk management
Risk is defined as ‘the chance of exposure to the adverse consequences of future events’. A risk is anything that will have a negative impact on any one or all of the primary project constraints – Time, Scope and Cost. All projects include some risk.
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Cost overrun. Missed deadlines. Poor quality. Disappointed customers. Business disruption.
Identification and management of risks is therefore important as they will cause project deadlines to be missed resulting in overall slippage of the project timetable. Risk management comprises:
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risk assessment (identifying and analysing risk) – assessing the loss probability and magnitude for each item
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risk control (taking steps to reduce risk, provide contingency and monitor improvements).
The processes are iterative throughout the life of the project and should be built into the project management activities.
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Risk and uncertainty Risk and uncertainty arise from measurement errors, lack of data, and the underlying variability of complex natural, physical, sociaand economic situations. There are four types of uncertainty.
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Variation in activity durations, costs and the exact performance level of the resources.
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Foreseen risks refers to a distinct and identifiable project influence that may or may not have an impact on the project.
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Unforeseen uncertainty – as its name suggests cannot be identified during project planning. There is no plan B. The team either is unaware of the event’s possibility or considers it unlikely and does not bother creating contingencies.
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Chaos – whereas projects subject to unforeseen uncertainty start out with reasonably stable assumptions and goals, projects subject to chaos do not. Even the basic structure of the project plan is uncertain, as is the case when technology is changing rapidly or when research, not development, is the main goal.
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Risk assessment – identifying and analysing risk Once the project has received approval to proceed, risk identification is usually done initially by involving key stakeholders. The team considers:
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Risks – what might go wrong?
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Triggers – symptoms and warning signs that indicate whether each risk is likely to occur.
Alternatives – better methods of achieving the project’s purpose and need.
Risks can result in four types of consequences:
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benefits are delayed or reduced timeframes are extended outlays are advanced or increased output quality (fitness for purpose) is reduced.
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Handling risk Risks can be handled in a number of different ways.
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Ignore the risks and do nothing – appropriate where the effect of the risk is small and the chances of it occurring remote.
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Purchase insurance against the risk.
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Protect against the risk – arrange for additional staff to be available at critical parts of the project to minimise the possibility of the project over running.
Transfer the risk – e.g. arranging for third parties to complete the riskier parts of the project.
Risk mitigation actions or treatment reduce the chance that a risk will be realised and/or reduce the seriousness of a risk that is realised. There are two broad types of risk mitigation or treatment activities.
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Preventative – planned actions to reduce the likelihood a risk will occur and the seriousness if it does occur. In other words, what should you do now?
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Contingency – planned actions to reduce the seriousness of the risk, if it does occur. In other words, what should you do if the risk materialises?
Test your understanding 2
The identification of risk involves an overview of the project to establish what could go wrong and the consequences. What sorts of questions need to be asked to accomplish this?
Threat identification The following can threaten the success of a project. Identifying these in advance can help reduce the risk of slippage and other potential problems:
•
Poor management
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Poor planning Lack of control mechanisms Unrealistic deadlines Insufficient budget Moving targets
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4 Initiating a project
Project initiation may be defined as the process of defining planned deliverables and anticipation of those actions needed in order to complete a project.
Project initiation document The project initiation document (PID), should contain at least the following sections.
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Purpose statement – explains why the project is being undertaken.
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Deliverables – tend to be tangible elements of the project, such as reports, assets and other outputs.
Scope statement – puts boundaries to the project by outlining the major activities. This section is important in preventing ‘scope creep’, where additional activities are added making achievement of the cost and time objectives totally impossible.
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Cost and time estimates – it is a good idea for the project team to have some feel for the organisation’s expectations in terms of the project budget. These estimates will be modified later in the project, but are necessary to give a starting point for planning.
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Objectives – a clear statement of the mission, CSFs and milestones of the project.
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Stakeholders – a list of the major stakeholders in the project and their interest in the project.
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Chain of command – a statement (and diagram) of the project organisation structure.
SWOT analysis SWOT was discussed in earlier chapters as a tool for strategic position analysis. The headings can also be used at the early stages of a project to assess the starting position or as part of a periodic report to the project sponsor to summarise progress and raise issues. The internal appraisal should identify:
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strengths – the organisation’s strengths that the project may be able to exploit
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weaknesses – organisational weaknesses that may impact on the project.
The external appraisal should identify:
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opportunities – events or changes outside the project that can be exploited to the advantage of the project
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threats – events or changes outside the project that should be defended against.
The four parts of the SWOT analysis are shown in the diagram below. Strengths
Weaknesses
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The things that are going well (or • have gone well) in the projects
• • •
The skills that area prized Major successes Parts of the project that are well received by the users or where completed early
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The things that are going badly (or have gone badly) in the projects The skills that are lacking Major failures Parts of the project that are poorly received by the users or were completedlate
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•
•
Threats
Events or changes outside the • project (elsewhere in the organisation or its business environment) that can be exploited to the advantage of the project • Things likely to go well in the future
Events or changes outside the project (elsewhere in the organisation or its business environment) that should be defended against Things likely to go badly in the future
Test your understanding 3
The internal and external appraisals of SWOT analysis will be brought together and it is likely that alternative strategies will emerge. Which technique from the following list will management probably adopt? (a) Major strengths and threats can be exploited. (b) Major strengths and profitable opportunities can be exploited. (c) Major weaknesses and opportunities can be developed into strategies. (d) Major weaknesses and strengths will be identified to find alternative strategies.
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5 Project plan Importance of a project plan A project plan aims to ensure that the project objectives are achieved within the constraints of quality, cost and time. Planning is essential – it helps to:
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make clear the commitment of time, resources (people and equipment), and money required for the project
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determine if targets are achievable identify the activities the resources need to undertake.
Once the basic project objective and underlying activities are agreed, the plan involves:
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breaking the project down into manageable units
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scheduling and planning resource requirements and timings of each unit and subunit.
for each unit, estimating the resources needed – money (an accurate estimate of project costs provides a proper basis for management control), materials and time
There is also a ‘soft side’ to project planning:
• •
the hard side of project planning focuses on schedule and dates the softside of project planning focuses on teambuilding through obtaining buyin around a shared goal.
The planning steps include:
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assemble a ‘core project team’ – they should represent the major functional areas that will contribute effort to the project and begin by seeking clarity for the goals of the project and alignment of the team around those goals
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the project team must focus on identifying and logically sequencing the tasks or ‘deliverables’ and dependencies or ‘handoffs’ that are required to achieve the project goals
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the core team members will take the plan back to their functional areas to be scrutinised by the functional team to make sure that all the assumptions in the plan so far are valid – this helps achieve buyin of the plan beyond the core project team
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assign resources and duration times to the tasks.
With this information, the project manager is able to finalise the hardside of project plan. The benefits to organisations that engage in this part of project planning are significant.
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They have built a team that has rallied around a shared goal.
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They have gained the buyin of not just a few people, but of an entire core team that has extended its reach out to the functional areas that contribute to the project.
Contents of a project plan For a large project the contents of the plan will be made up of several parts:
To provide an overview of the project the project plan will include the following.
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Background to the project – a summary of the background to the project (and how it builds on previous work) and the need for it (and why it is important).
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Aims and objectives – a list of the broad aim or purpose of the project, and the specific objectives you intend to achieve.
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Overall approach – a description of the overall approach you will take to achieve the objectives outlined above, including: – strategy and/or methodology and how the work will be structured
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important issues to be addressed, e.g. interoperability
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scope and boundaries of the work, including any issues that will not be covered
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link to critical success factors.
Project outputs – a list of the tangible deliverables (including reports) your project will create, and the less tangible knowledge and experience you hope to build and share.
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Project outcomes – a list of the outcomes you envisage and what change they will stimulate or enable.
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Stakeholder analysis using Mendelow’s powerinterest matrix – a list of the key stakeholder groups and individuals that will be interested in your project outcomes, will be affected by them, or whose support/approval is essential, both within your organisation and in the community, and assess their importance (low/medium/high). Stakeholder
Interest/stake
Importance
Risk analysis – a list of the factors that could pose a risk to the project’s success and an assessment of their likelihood and severity, and how you will prevent them from happening (or manage them if they occur). Cover the types of risks listed and any others that apply. Risk
Probability Severity Score Action to prevent/ (1–5) (1–5) (P x S) manage risk
Staffing
Organisational
Technical
External suppliers
Legal
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Standards – a list of the standards the project will use.
Name of standard or specification
•
Version
Notes
Intellectual property rights – an indication of who will own the intellectual property created by the project and a list of any owned by third parties that will be incorporated into project outputs, when/how you will obtain permission to use them, and any implications for project outputs after the project ends.
The project resources part of the plan will contain details of the project partners and project management with a brief description of the project management framework, including:
• • • •
organisation reporting relationships decision process the role of any local management committee.
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The detailed part of the plan will outline:
• • •
the project deliverables and reports when they are due the phasing of the work and any dependencies.
It may also contain a Gantt chart, diagram, or flowchart to illustrate the phasing budget. The evaluation plan will indicate how you will evaluate the quality of the project outputs and the success of the project. It will list the factors you plan to evaluate, questions the evaluation will answer, methods you will use, and how success will be measured. Timing Factor to evaluate Questions to address Method(s) Measure of success The quality plan will explain the quality assurance procedures you will put in place to ensure that project deliverables meet quality expectations and acceptance criteria. A separate quality plan is required for each deliverable (see chapter 11 for more detail): The dissemination plan will explain how the project will share outcomes and learning with stakeholders. It will list the important dissemination activities planned throughout the project – indicating:
• • • •
purpose target audience timing key message.
The exit and sustainability plans should explain what will happen to project outputs at the end of the project (including knowledge and learning). They will focus on the work needed to ensure they are taken up by the owners and any work needed for project closedown, e.g. preservation, maintenance, documentation. The sustainability plan will list any project outputs that may have potential to live on after the project ends, why, how they might be taken forward, and any issues involved in making them sustainable in the long term.
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Test your understanding 4
What is meant by project planning, and who should be involved in the process?
6 Process redesign, ebusiness, systems development and quality initiatives as projects Process redesign project Business process redesign often involves specific projects linked to specific processes.
Illustration 2 – Process redesign project
Stage
Steps
Project redesign • planning
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Refine scope of the • project • Establish schedule and plan
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Organisation diagram Opportunities and threats worksheet Project plan
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Project management Analysis of • existing process
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Process redesign •
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Define IS process, • activities and • management system
Organisation diagram
Identify the disconnects
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Existing process analysis and improvement worksheet
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Existing specific activity analysis and cost worksheets
Eliminate disconnects • and improve process fit
Proposed process diagrams to various levels of detail and with measures
Define alternative processes
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Define proposed process, activities, management system and measures •
• Resource development
Managing the implementation
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Create and test new • software
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Draw up new job descriptions
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Develop training/ education
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Manage ongoing process
• •
Existing process diagrams
Proposed process analysis and improvement worksheet Proposed specific activity analysis and cost worksheet Process/ responsibility worksheet Proposed workflow model Job model Job analysis worksheets
Systems development project The V model discussed in the Information Technology chapter is a good example of how project management principles can be applied to IT scenarios. Developing ebusiness opportunities often involves specific projects. Typical steps might include:
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Design. Site Construction. System Integration. System Test. Final Evaluation.
Quality initiatives project There are many quality initiatives that require project management skills such as TQM and implementation of sixsigma. Six Sigma projects are organised around:
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existing processes (DMAIC) new processes (DMADV).
Existing processes (DMAIC)
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D – Define what is meant by • the outoftolerance range
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M – Measure the key internal processes that are critical to • quality
• • •
New processes (DMADV) D – Define the process and where it would fail to meet customer needs M – Measure to determine whether the process meets these customer needs
A – Analyse why defects occur
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I – Improve the process to stay within the tolerance limit
A – Analyse the options available that will meet customer needs
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C – Control the process to stay within this limit.
D – Design in changes to the process to meet customer needs
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V – Verify that the changes have met customer needs
Illustration 3 – Process redesign project Six Sigma project for a retail display.
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Define – marketing has designed a ‘fancy’ display unit that they think will outperform the ‘standard’ display unit and they want to put one in every store. The ‘fancy’ display is ten times the cost of a ‘standard’ display and all stores already have ‘standard’ units. Should the new displays be purchased?
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Measures – collect data for each store on sales of this product for every day.
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Analyse – the stores identified at least three other factors besides display type that could impact sales. The range for each factor was identified. Design of experiments was conducted.
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Improve – the ‘fancy’ display had no significant impact on sales so were not ordered for any more stores, with considerable cost savings.
•
Control – future changes will be tested and evaluated.
Test your understanding 5
Identify the areas where quality issues may be raised when applied to a service business such as a bank or restaurant.
7 Managing and leading projects Projects require people with different skills to work together in a co ordinated way. The project team consists of individuals brought together purely for undertaking a specific project. Teams will cut across functional boundaries, giving rise to ‘matrix’ organisations. The size of the team and the period of their existence will be determined by the nature of the project.
Matrix structures It is important that an organisational structure is developed for the project such as the matrix structure, originally studied in paper F1. Projects are often interdisciplinary and cross organisational reporting lines. The project team is likely to be made up of members drawn from a variety of different functions or divisions: each individual then has a dual role, as he or she maintains functional/divisional responsibilities as well as membership of the project team.
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Team members A team member is selected to join the core team because of their specialist knowledge or expertise. They are usually drawn from a functional department and therefore have a further responsibility in representing that department. Some of the roles taken on by team members in organisations include:
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Specialist or technical expert – brings specialist knowledge and advice to the team.
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Representative – as part of the core team, the member represents their ‘home’ department and as part of the project team communicates the project team’s views and decisions when back in their ‘home’ department.
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Monitor and change manager – will monitor their progress against the plan appropriately and regularly and as changes are identified will ensure that the full implications have been assessed before the changes are agreed and implemented.
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Problem solver – will be faced with many problems during any project and will be required to solve them by drawing on the resources of the project team and their ‘home’ department and through the use of problemsolving techniques.
Project sponsor The project sponsor or project facilitator will normally be a senior member of the management team.
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They are often chosen as the person with the most to gain from the success of the project and the most to lose from the failure of it.
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Their job is to direct the project, and allow the project manager to manage the project.
The roles taken on by project sponsors in organisations include:
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gatekeeper – choosing the right projects for the business means ensuring that only projects that support the business strategy are started and that they are of sufficiently high priority and have clear terms of reference
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sponsor and monitor – steering the project by requesting regular meetings with the project leader and giving advice and guidance
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supporter and coach – provides practical support for the project leader, especially if they are taking on a project that is larger or more significant than they have handled before
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decisionmaker – if decisions are required that are outside the scope of the project then the project sponsor will make the decision on behalf of the organisation
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champion or advocate – involves informal communication with other senior managers to ensure that they continue to have an objective view of the importance of their project in relation to other projects within the business
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problem solver – when the team faces problems that it is unable to solve or does not have the skills or experience to solve
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resource negotiator – a project’s success will depend on the availability of the right resources at the right time. In crossfunctional projects the sponsor may provide assistance in negotiating resources around the company.
The project manager The project manager is the person appointed by the organisation to lead the team, and manage it on a daytoday basis. Primarily the project manager’s responsibility is to deliver the project and to ensure that effectiveness and efficiency are achieved across the entire project. Some of the roles taken on by project managers in organisations include:
•
Team leader – will spend time building the team, motivating individuals and ensuring that the project has a clear purpose and that every core team member understands that purpose.
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Planner and coordinator – will ensure that the team creates a realistic plan and will often consolidate the individual team members’ plans into a full project plan. They will then coordinate the activities of the team to meet that plan and deal with changes in a systematic way.
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Task manager – involves clarifying the goals of the project and ensuring that every action is moving the project towards those goals.
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Communicator and relationship manager – will take the lead in proactively communicating the project in an appropriate way to all the stakeholders and manage the relationship with key stakeholders to ensure their needs are being met.
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Problem solver – will be faced with many problems during any project and will be required to solve them through team problem solving techniques.
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Monitor and change manager – will put controls in place to ensure the project progresses against the plan and is monitored appropriately and regularly.
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Budget manager – will involve setting up the budget and then monitoring its use to ensure the best use of resources.
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Meeting manager – most project teams only meet as a team during project meetings so it is very important that each meeting is well managed.
While there are clearly overlaps, there are some important differences between a project manager and a ‘normal’ line manager:
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line managers are usually specialists whereas project managers are often generalists
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line managers operate close to the technical tasks in their departments, whereas project managers may have to oversee work in many different areas
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line managers exercise direct supervisory authority, whereas project managers facilitate rather than supervise team members.
Typical problems faced by a project manager will include:
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managing staff who are assigned to the project parttime and have responsibilities in their ‘home’ departments
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managing the relationship with the departmental managers who have staff on the project team
•
managing the size of the team given variable resource requirements throughout the project life cycle
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dealing with specialists in areas where the manager is not an expert.
Monitoring the project The purpose of the project monitoring, reviewing and controlling process is to track all major project variables and to ensure the team is making satisfactory progress to the project goals. Performance measurements can include.
• •
Expenditure (cost)
• • • • •
Scope measures – both product scope and project scope
Schedule (time) performance avoiding schedule slippage is a key objective. Functional quality Technical quality performance Issue management performance Client satisfaction measures
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Project control Controlling the project means:
• • •
taking early corrective action when needed balancing project effort looking for where effort can be reduced
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making changes early rather than late.
Measurement of all relevant variables is important both for management information and also for the specification of ‘what kind’ and ‘how much’ corrective action is necessary. Examples of corrective action include:
•
‘fast tracking’ – a project management technique used to ensure that projects are completed within the shortest time possible, often by doing some activities in parallel that would normally be done in sequence (such as design and construction)
•
‘crashing’ – Project crashing is a method for shortening the project duration by reducing the time of one or more of the critical project activities to less than its normal activity time. The object of crashing is to reduce project duration while minimizing the cost of crashing
• • • • • • •
adding additional resources (people, money, time, etc.) scope reduction compromising quality adopting higher risk but potentially better approaches employee/contractor disciplinary actions (negative reinforcement) employee/contractor incentives (positive reinforcement) pep talks and other motivation, etc.
Some corrective actions tend to be more tactical, and some more strategic.
Test your understanding 6
Printplus Inc is a printing company that has recently begun implementing a new computerised job costing system. The project manager who had started the project is now no longer with the company. You have been asked to step into the role of the project manager and complete the task of implementing the new system. (a) Briefly describe the key factors that you will need to review in order to get to grips with the current status of the project. (b) Identify possible threats to timely completion of the project, and state briefly how they can be minimised.
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8 Project completion The final stages of a broadly successful project can be most rewarding. It is at this stage that people can finally see the realisation of plans and objectives. Elements involved in project finalisation:
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acceptance by client – the outputs of the project should be successfully transferred to the project’s clients or users
•
review of outputs against goals – the project team should be able to illustrate that the project has delivered its planned outputs and that outcomes can reasonably be expected to flow from them
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disbanding the team and ‘tying up loose ends’ – it is important to ensure that all project activities are satisfactorily completed and project teams should be gradually wound down
•
endofproject review – for large projects this may be a useful way of identifying issues and concerns that could be relevant to other projects. Key areas to review include the following: – Technical performance review (was scope of project achieved?).
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Cost/budget performance.
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Schedule performance.
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Project planning and control.
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Team relationships.
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Problem identification.
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Customer relationships.
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Communication.
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Risk evaluation and assessment of risk management policies.
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Outstanding issues.
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Recommendations for future management of projects.
closure by steering committee – the project steering committee cannot disband until the project’s outcomes are seen as achieved, or the project is classed as unsuccessful.
A postcompletion audit is vital because a project cannot be said to be successful until management is assured that all the benefits promised at the evaluation stage can be shown to have been subsequently realised. Note: "benefits realisation" can be viewed as the final stage of the V model. Acceptance testing seeks to ensure that the original requirements specified for a project are met.
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Reasons why change fails to deliver benefits include:
• • •
vision and objectives either not clear or shared and owned
• •
business change ignored or undervalued
•
making the right investment decision; to make the right investment decision we first need a clear understanding of what needs to be done and why it needs to be done now.
benefits/outcomes not adequately owned, tracked and reported portfolio of programmes not all aligned to organisation’s mission or strategy projects/programmes seen as delivering a capability rather than benefits
Test your understanding 7
Use a personal example, such as a holiday, to describe the stages of the project lifecycle.
9 Project management software The planning and control of the project will be assisted through the use of appropriate software. The type of output produced by the package will vary depending upon the package being used e.g. FastPLAN and Winproject. They may be used in a variety of ways. Planning:
• • •
The ability to create multiple network diagrams. The ability to create multiple Gantt charts. The ability to create PID, PQP and WBS.
Estimating:
• • •
The ability to consider alternative resource allocation. The ability to create and allocate project budgets. The ability to allocate time across multiple tasks.
Monitoring:
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Network links to all project team members.
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A central store for all project results and documentation. Automatic comparison to the plan, and plan revision.
Reporting:
• • •
Access to team members. Ability to create technical documents. Ability to create end of stage reports.
Advantages:
• • •
Improved planning and control. Improved communication. Improved quality of systems developed.
Project management software recognises that there is a sequence in which activities need to be performed. The software package will require four items of information.
• • • •
Duration of each activity. Dependencies of activities. Resources available. At what stage the resource will become available.
When choosing project management software, or indeed any software package, it is important to:
•
determine requirements of organisation including its current and future needs
•
document requirements including the essential functions/important/wish list
•
review all available packages to identify three/four products which meet the essential functions and fall within budget
• •
have a demonstration of the packages on a trial basis if possible select a package including ‘roll out’ strategy with installation, training, etc.
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10 Chapter summary
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Test your understanding answers
Test your understanding 1 Visualise a current project. Which of the three constraints is the driver? Which is the weak constraint? If you ask enough comparative questions, you will develop a hierarchy of the constraints. The following questions can be used to explore your project.
•
If I had to choose between spending more time on the project or cutting quality, which would I choose?
•
If I had to choose between delivering the project on time (and spending more money) or keeping the project on budget, which should I choose?
•
If the project began running over budget, would I immediately consider cutting features or quality?
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If the project is behind schedule, would I spend more money to get back on schedule?
Test your understanding 2 The type of questions include.
• • • • •
What are the sources of risk? What is the likelihood of the risk presenting itself? To what extent can the risk be controlled? What are the consequences of that risk presenting itself? To what extent can those consequences be controlled?
Test your understanding 3 The technique that management will probably adopt is: (b) major strengths and profitable opportunities can be exploited.
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Test your understanding 4 Project planning is the arrangement of the activities required to achieve the project objective.
•
The first part of this stage is the establishment and agreement of the project objectives. This means determining exactly what the project aims to achieve.
•
The next stage is to determine what activities or tasks need to be undertaken to achieve the objective. The project plan articulates exactly what needs to be achieved, how it is to be achieved, by whom and at what time in the project’s life. It is a benchmark against which actual project results can be compared and monitored. If the comparison of actual versus plan indicates a deviation, then corrective action needs to be taken.
It is important that the planning stage involves the members of staff who will be working on the project. These people will be in the best position to know what activities will be needed, how they will be performed and how long they will take. In addition, by encouraging team participation in planning, it is more likely that they will become committed to achieving their activity targets.
Test your understanding 5 The areas that quality issues in service businesses are raised include:
• • • •
Customer expectations. The process by which the service is delivered. The attitudes and demeanour of the people giving the service. The environment of the service encounter.
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Test your understanding 6 (a) The following key factors should be considered in reviewing the current status of the project. –
Time. The progress reports on the project should be reviewed, to determine whether or not the project is currently on target for completion within the expected time. An assessment should be made as to whether the remaining tasks can be completed by the original deadline.
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Resources. I shall also need to identify the resources that have been allocated to the project. Resources include both human resources and computer equipment/time. Having established what resources have been made available, I should then make an assessment of how sufficient or effective these are for achieving the project goals.
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Cost. I should look at the original budget for the project and review this in the context of the actual costs incurred to date. I should then try to make a sensible estimate of the further costs that will be incurred in completing the project.
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Quality. The project plan should be reviewed to find out whether or not any quality standards were agreed for the intermediary stages of the project. If they were, I need to establish whether or not these standards are being met.
(b) The following may be identified as key threats to completion of the project on time. Possible threat
Minimise by
Poor management of time
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Discuss stage and completion deadline with the project team
•
Stress the importance of completion targets
•
Regular progress reports and progress meetings
Poor planning
•
Using planning tools such as Gantt charts or CPA
Lack of control mechanisms
• •
Set milestones
Unrealistic deadlines •
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•
Focus cost compromises on least critical areas
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Negotiate injection of resources to complete on time
Test your understanding 7 Using a holiday, we can describe the stages of the project lifecycle:
•
Identify the need – you have been working hard and feel a holiday will make you feel better. A friend has suggested visiting a place that is very interesting archaeologically.
•
Develop a proposed solution – pick up brochures from the travel agents, look on Teletext and sites on the internet to find a suitable venue. Check that the prices, times, modes of travel, health and political restrictions are all favourable. Buy a travel guide and note the places of interest. Check that the holiday chosen fulfils all the objectives and then book it at the best price available. Start planning the other aspects of the holiday – the clothes, passport, excursions and luggage.
•
Project performance (including the monitoring and control) – go on holiday and, while enjoying yourself, make sure that the travel arrangements and accommodation are as expected and all the planned trips can be achieved within budget.
•
Project closure – return home, evaluate and appraise the holiday and get back to work to pay for the next trip.
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The role of finance in formulating and implementing business strategy Chapter learning objectives Upon completion of this chapter you will be able to:
•
explain, for both profitseeking and nonprofitseeking organisations, the relationship between strategy and finance
•
determine, from information provided, the overall investment requirements of a business
•
identify the advantages and disadvantages of alternative sources of finance listed in a question
•
explain, for businesses in general, how their current and non current assets should be managed with regard to finance and risk
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using information provided in the question, devise and apply appropriate ratios to assess how efficiently an organisation is using its current resources
•
using information provided in the question, apply appropriate gearing ratios to assess the risks associated with financing and investment in the organisation
•
using information provided in the question, apply appropriate liquidity ratios to assess the organisation’s shortterm commitments to creditors and employees
•
using information provided in the question, apply appropriate profitability ratios to assess the viability of chosen strategies
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The role of finance in formulating and implementing business strategy
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using information provided in the question, apply appropriate investment ratios to assist investors and shareholders in evaluating organisational performance and strategy.
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1 The relationship between strategy and finance Overview Finance can be a critical factor for identifying and implementing successful strategies. Key issues are as follows: Managing for value
• •
Are funds being used to increase shareholder value?
•
Once strategies are adopted, management need to ensure that funds from operations are optimised. This will involve a focus on cost and value drivers, for example.
This involves analysis of investment opportunities and corresponding costs of finance.
Financial expectations of stakeholders
•
Shareholders want to see their wealth increased in terms of growing dividends and an improving share price.
•
This requires a business that can generate sufficient cash to pay dividends and reinvest for the future.
•
However, there are financial expectations for other stakeholders as well.
Funding strategies
• •
Which SBUs in the company’s portfolio should be funded? What is the most appropriate way of funding particular investments, balancing business and financial risks?
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The role of finance in formulating and implementing business strategy Strategic choice and financial analysis The main aspect of strategic planning that is impacted by and impacts finance is strategic choice: Aspect
Key concerns
Acceptability Returns to stakeholders
Risk
Feasibility
Resources
Financial analysis
•
Cash flow forecasts to ensure dividend growth requirements can be met
• • • • • • •
NPV
• • •
Sensitivity
•
Cash flow forecast to identify funding needs
• • •
Ability to raise finance needed
ROCE Valuation of real options Shareholder value analysis Economic value added Costbenefit analysis Ratio analysis (e.g. dividend yield, growth)
Breakeven Ratio analysis (e.g. gearing, dividend cover)
Working capital implications Foreign exchange implications
Test your understanding 1
What are the differences in strategic and operational decisions that a financial manager in a stateowned enterprise makes compared to one in the private sector listed company on the Stock Exchange?
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Managing for value All organisations benefit from committing themselves to a strategy that describes:
• • •
the value that an organisation intends to produce the means it will rely on to produce that value how it will sustain itself in the future.
Any business organisation can be viewed as a system for adding value to its inputs.
•
The organisation takes various factors of production (land, labour, capital, etc.) and uses its expertise to combine them with a variety of activities.
•
Where the end user is prepared to pay more than the cost of these activities, the organisation has created value.
•
Businesses with a competitive advantage create value more effectively than their competitors.
•
This value can then be distributed in a way that keeps financial stakeholders satisfied as well as the organisation investing in its own future.
Value creation is achieved using three key elements of strategic management, as shown below:
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Managing for Value (MFV) moves the focus of business management away from a largely ‘scaledriven’ approach.
• • •
How much do we produce of this? How many countries do we sell to? Are we the biggest?
Towards a ‘valuedriven’ approach.
•
What contribution is this brand or this product range making to the overall value of the company?
•
What financial return are we obtaining from our ongoing investment in it?
This shift in approach recognises the importance of providing adequate returns to shareholders and of keeping the good opinion of institutional investors.
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Illustration 1 – The relationship between strategy and finance Adopting MFV caused Cadbury Schweppes to scrutinise all its operations. The company rationalised its activities, sold those beverage brands that were underperforming and as a consequence withdrew from participating in beverages in more than 150 markets. By selling its underperforming beverage brands to other firms, Cadbury Schweppes raised almost $1 billion. This led to a new challenge: how to put this inflow of funds to best use within the overall MFV initiative. It reviewed its business in search of the most promising ‘areas for action’. Applying MFV principles Cadbury Schweppes challenged all its businesses to find ways to use funds that would tackle two problems simultaneously: to revitalise some familiar brands and to produce a higher return on advertising expenditure. Cadbury Trebor Bassett in the UK responded with a new Cadbury creation: Cadbury LAND, which took a year to develop. Cadbury LAND capitalises on children’s love of likeable characters placed in a world of their own. A character is attached to each brand. The character’s persona reflects the brand. Each is rather zany. Thus, Buttons is ‘a bit dizzy and giggles a lot’, Wildlife is ‘an eccentric old buffer’ and Fudge is ‘a bit of a loony’.
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chapter 13 In early 1999, Cadbury achieved the biggest share of the market for children’s chocolate, in terms of total sales value – a position it has kept. MFV requires a company and all of its employees to understand how and where value is created and how and where it is destroyed. Cadbury LAND was created within the disciplined framework that an MFV approach imposes.
Funding strategies
•
Funding strategies should be focused on balancing the business and financial risks faced by shareholders.
•
In simplistic terms, if SBUs have high business risk, then funding should be selected with lower financial risk (i.e. low gearing, so use equity).
•
In addition, the expectations/profile of equity investors can be matched with project characteristics (e.g. growth).
A useful model for considering these is the BCG Matrix met as part of strategy analysis earlier in the syllabus. Star
Problem child
• • •
High growth
• • •
High growth
•
High reinvestment rate so medium dividends
•
Low or zero dividends in the short term.
High business risk Use some retained earnings and new equity from investors seeking growth
Very high business risk Use equity from venture capital
Cash cow
Dog
• • •
Low growth
• • • •
•
Large net cash inflows to support dividends
Medium business risk Use retained earnings (and debt if necessary)
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Low growth Low business risk Use debt until divest Zero reinvestment rate so high dividends
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Financial expectations of stakeholders
It is generally accepted that the strategic objective of a profitseeking organisation is the longterm goal of maximising the wealth of the owners (usually shareholders) of the organisation.
•
Shareholder view – the only responsibility for business is to make money for shareholders – the market is the best way to allocate scarce resources.
•
Stakeholder view – there is a responsibility for organisations to regulate the employment relationship to ensure fairness for a range of stakeholders.
It is no longer enough to be profitable and have positive cash flow to be judged successful. All of the company’s stakeholders require the company to perform within a narrow band of predetermined expectations. Failure to fall within the band of expected performance can, and will, result in:
• • • •
reduced access to funding both debt and equity loss of employee morale and demotivation loss of customers and suppliers shareholder revolt.
Unless otherwise prewarned:
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• •
lenders expect profits, positive cash flow, growth and debt reduction
•
creditors and suppliers expect payment within invoice terms and growth
employees expect increased wages and benefits as well as stable employment and growth
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customers expect timely and complete delivery of services and products with increasing value and quality at appropriate pricing
•
shareholders expect the continuance of the business enterprise and a fair financial return as payment of risk bearing and the use of their capital.
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2 Notforprofit organisations Objectives of ‘notforprofit’ organisations Organisations such as charities and trade unions are not run to make profits, but to benefit prescribed groups of people. Since the services provided are limited primarily by the funds available, their aim is:
•
to raise the maximum possible sum each year (net of fundraising expenses)
•
to spend this sum as effectively as possible on the target group (with the minimum of administration costs).
Notforprofit organisations will normally set targets for particular aspects of each accounting period’s finances, such as the following.
• •
Total to be raised in grants and voluntary income.
• •
Amounts to be spent on specified projects.
Maximum percentage that fundraising expenses represents of this total. Maximum permitted administration costs.
The actual figures achieved can then be compared with these targets and control action taken if necessary.
Value management in NFPs An alternative strategy model developed for use with government organisations focuses the attention of managers on three key issues:
• • •
public value to be created sources of legitimacy and support for the organisation operational capacity to deliver the value.
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The role of finance in formulating and implementing business strategy This focuses attention on social purpose and on the ways in which society as a whole might be mobilised to contribute to social purposes rather than on the financial objectives that can be achieved by selling products and services to markets.
Funding strategies for NFPs What most nonprofit organisations need are their core costs covered.
Core costs are the expenditure budgets that are not connected with the levels of activity undertaken by an organisation.
They are:
•
the costs that will always need to be funded, regardless of the number of projects and
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are usually fundamental to the organisation’s survival, even if they cannot be directly associated with any specific outcome.
Core costs can be placed under three headings: Management
Research and development
Support services
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Costs associated with governance, board meetings, etc.
• • •
User engagement and consultation
•
Innovation – costs associated with developing new activities and ways of operating (before they attract funding)
• •
Quality assurance
• • • • • • •
IT, telephone, postage and fax
Monitoring and evaluation CEO and associated staff
Staff training and development
Finance and audit Income generation (including fundraising) Marketing for the organisation Premises Travel and subsistence Personnel
An organisation can only look ahead with confidence when the fundamental core costs are securely funded. 296
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chapter 13 Creating a core funding strategy has different forms at each stage of a non profitseeking organisation’s evolution.
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Infancy – tends to be heavily dependent on one funding source, which can limit independence.
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Growth phase – if funded by a multitude of projects and many donors it is prone to the pitfalls of mission creep (the expansion of a project or mission beyond its original goals, often after initial successes) and inefficiency.
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Maturity and maintenance – funding should be derived from a constantly changing mix of sources.
Illustration 2 – Notforprofit organisations For a nongovernmental organisation (NGO), protecting the core funding is the responsibility of the trustees. This requires more than ensuring that the annual accounts do not show an unrestricted deficit, all NGOs need to have a long term plan as to how the core funds will be met for years ahead. A core funding strategy is a forward thinking, evolving document. It is more than a policy. An NGO’s CEO, Fundraising Director/Manager and the Finance Director/Manager will need to develop the actual strategy and manage its implementation. Each project manager will need to understand how their project budget contributes to the overall strategy. There are five main elements to core funding.
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Strategic funding – is funding from regular, reliable donors who make an openended commitment to an organisation, e.g. institutional donors, wealthy individuals and faithbased communities.
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Apportioning overheads into project budgets – sometimes referred to as the business model, as it is a common formula for determining product pricing. Each project budget is expected to make a contribution towards overheads.
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Selfgenerated income – is where part of the core costs is funded by activities within its own control – where the donors don’t specify how the funds are to be applied, e.g. an endowment, trading, fundraising events, legacy income and membership income.
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Developmental funding – donors agree to invest in the transformation of an organisation’s infrastructure for a defined period. They can be described as ‘second stage pump primers’.
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•
Cost minimisation – is astute financial management aimed at reducing core costs to an acceptable minimum. Securing gifts in kind and volunteers are excellent ways of minimising costs, as long as these gifts and the volunteers are effective in ensuring that core activities are delivered.
Illustration 3 – Notforprofit organisations An NGO has core costs of around $48,000 pa. If it is relying on apportioning income from projects to cover these costs, using a formula of 15% of project income, total project income will need to be $320,000 (15% is $48,000) to fully fund the core costs. Apportioning overheads into project budgets could work like this: Total income Project income Apportioned core income
$368,000 $320,000 _______ $48,000
The level of income could be derived from a mix of four projects: Projects 1 2 3 4 Total
Total budget ($) 75,000 125,000 88,000 80,000 368,000
Overhead allocation (@15%) $9,782 $16,302 $11,479 $10,437 $48,000
This can lead to unacceptably high overhead allocations if an organisation has only a small range of projects. In the above example, if one project ceases then either the NGO must find a replacement, or spread the overheads across the remaining two projects. This can make the project costs unacceptably high for donors. It can also lead to NGOs developing projects for no other reason than to fund core costs. In this situation it is easy to be ‘funding led’. This is where part of an NGO’s core costs is funded by activities within its own control – where the donors do not specify how the funds are to be applied. There is no connection between the levels of income from these forms of fundraising and the numbers of operational projects. 298
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Test your understanding 2
An NGO has four main projects. (1) Education project. (2) Information and counselling service. (3) Employment advice service. (4) Advocacy. Contribution to core costs from project income:
Education – income from the EU Information and counselling service
Project Contribution to income ($) core costs ($) 60,000 8,000 80,000 12,000
– income from UK DFID Employment advice service
40,000
– income from International NGOs Advocacy
60,000
(5,000)
40,000 ––––––– $280,000 –––––––
40,000 ––––––– $63,000 –––––––
($5,000 deficit funded from core costs) Membership and trust appeals Total
The NGO’s core costs (the office rent, the CEO and the administrative expenses of running the charity) amount to $70,000 pa and, as the total funds available for core costs is only $63,000, the NGO has a core funding deficit of $7,000. What are the options for funding this deficit?
3 Financing decisions Funding requirements Cash forecasting is vital to ensure that sufficient funds will be available when they are needed to sustain the activities of an enterprise, at an acceptable cost. Forecasts provide an early warning of liquidity problems by estimating:
• •
how much cash is required when it is required
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• •
how long it will be required for whether it will be available from anticipated sources.
Any forecast deficiency will have to be funded.
Alternative sources of finance A business faces three major issues when selecting an appropriate source of finance for a new project.
•
Can the finance be raised from internal sources or will it have to be raised outside the business? If spare cash exists, this is the most obvious source of finance for the new project.
• •
If finance needs to be raised externally, should it be debt or equity? If external debt or equity is to be used, where should it be raised from and in which form?
Financing was covered in detail in paper F9. A brief summary of alternatives and considerations are given here.
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Factors to consider when choosing a financing package (1) Cost –
A bank loan is cheaper than an overdraft. Why? Because it is less risky from the bank’s perspective. They have a repayment schedule, the loan may be secured, etc.
–
Risk to the investor is the main determinant of the cost of the finance.
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Risk to the investor is the main determinant of the cost of the finance.
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Thus debt is usually cheaper than equity finance.
–
The issue costs of debt are also lower than for equity.
(2) Gearing –
Debt is cheaper than equity but it has a hidden cost – as the level of debt increases the risk faced by the shareholders also increases. Thus their required return and hence the cost to the company will increase. Debt makes the equity more expensive.
–
We therefore have two effects of increased gearing – on the positive side the debt is cheap finance, on the negative side the extra risk is bad for the shareholders.
–
To see the net effect of gearing we need to look at theories of gearing – general consensus is that there is an optimal level of gearing that is best not exceeded.
(3) Control –
Debt does not usually convey voting rights. Neither do preference shares.
–
A public issue of shares may change the balance of control.
–
A rights issue will not change control, provided existing shareholders take up their rights. Legally, companies must offer new shares to existing shareholders first.
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The role of finance in formulating and implementing business strategy (4) Security –
Security is usually needed for debt.
–
In a question you could look at the existing balance sheet for possible assets for security but watch for existing loans as assets may already be taken.
–
Ideally assets will be land and buildings quality assets, thus presenting a problem for service industries.
(5) Cash flow –
A general rule of thumb is to try to match the lifetimes of finance flows and project flows.
–
If project cash flows are uncertain, then equity may be better as dividends may be cut if necessary.
–
Fixed interest rates make budgeting easier than floating rates.
–
Try to avoid loans maturing at the same time.
–
In practice a cash flow forecast is essential.
(6) Availability –
Further debt may be restricted by agreements (covenants) in existing loans.
–
Could shareholders afford a rights issue of the size suggested?
–
Difficult to issue equity if unquoted.
(7) Exit routes
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–
Could the company repay the finance early? E.g. leases may include penalty clauses.
–
Can investors get their money back early if they want to? Difficult if unquoted.
–
Venture capitalists want their money back in 57 years.
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Test your understanding 3
It is easier to revise sources of finance and ratios using a question. Spartan Inc. is a mediumsized manufacturing company that plans to increase capacity by purchasing new machinery at an initial cost of $3m. The following are the most recent financial statements of the company: Income statement for years ending 31 December
Turnover Cost of sales Gross profit Administration and distribution expenses Profit before interest and tax Interest Profit before tax Tax Profit after tax Dividends Retained earnings
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20X6 $ 000 5,000 3,100 _____ 1,900 400 _____ 1,500 400 _____ 1,100 330 _____ 770 390 _____ 380 _____
20X5 $ 000 5,000 3,000 _____ 2,000 250 _____ 1,750 380 _____ 1,370 400 _____ 970 390 _____ 580 _____
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The role of finance in formulating and implementing business strategy Balance sheets (statements of financial position) as at 31 December
Noncurrent assets Current assets Inventories Debtors Cash
Total assets Equity and liabilities Share capital Ordinary shares ($1 each) Reserves 10% Loan notes 2011 Current liabilities Total equity and liabilities
20X6 20X5 $ 000$ 000 $ 000$ 000 6,500 6,400 1,170 1,000 850 900 130 100 ______ ______ 2,150 2,000 8,650 8,400
3,500 500 4,000 3,500 1,150 8,650
3,500 120 3,620 3,500 1,280 8,400
The investment is expected to increase annual sales by 5,500 units. Investment in replacement machinery would be needed after five years. Financial data on the additional units to be sold is as follows: Selling price per unit Production costs per unit
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$500 $200
•
Variable administration and distribution expenses are expected to increase by $220,000 per year as a result of the increase in capacity.
•
In addition to the initial investment in new machinery, $400,000 would need to be invested in working capital.
•
The full amount of the initial investment in new machinery of $3 million will give rise to capital allowances on a 25% per year reducing balance basis. The scrap value of the machinery after five years is expected to be negligible.
•
Tax liabilities are paid in the year in which they arise and Spartan Inc. pays tax at 30% of annual profits.
•
The Finance Director of Spartan has proposed that the $3.4 million investment should be financed by an issue of loan notes at a fixed rate of 8% per year.
•
Spartan uses an aftertax discount rate of 12% to evaluate investment proposals. In preparing its financial statements, Spartan uses straightline depreciation over the expected life of fixed assets. KAPLAN PUBLISHING
chapter 13 Required Suggest alternative sources of finance that Spartan could use, outlining the advantages and disadvantages of each.
Test your understanding 4
In choosing between shortterm and longterm borrowing, what should the management take into consideration?
Test your understanding 5
What sources of finance are available to a public sector organisation?
4 Managing current and noncurrent assets
Current assets are items that are either cash already or that will soon lead to the receipt of cash. Inventories will be sold to customers and create debtors and debtors will soon pay in cash for their purchases. Noncurrent assets include fixed assets such as motor vehicles, plant and machinery, fixtures and fittings and land and buildings. Investments are also noncurrent assets.
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The role of finance in formulating and implementing business strategy In the context of cash flows and liquidity, the following are risks that have to be managed:
•
the risk that cash receipts will be lower than expected or that cash payments will be higher than expected, so that actual cash balances turn out to be much less than forecast
•
the risk that when the business is faced with a cash shortage, it is unable to borrow the money it needs, or unable to raise more cash by selling off some of its assets
•
the risk that when surplus cash is invested, the interest earned on the investment turns out to be much lower than it could have been.
The role of the cash manager is to monitor and control these risks, and to prevent them from threatening the survival of the business or having a significant impact on profitability. The management of cash involves a trade off between:
• •
liquidity – having enough cash available to meet everyday demands profitability/cost – holding high balances of cash is costly in terms of lost investment interest; while unexpected deficits can be expensive if emergency funding is necessary.
5 Ratio analysis Ratios Ratio analysis is particularly useful for assessing whether a strategy is achieving its desired targets. The mechanics of ratio analysis are repeated here for revision purposes. Profitability ratios • ROCE
=
Operating Profit (PBIT)/Capital Employed
•
Gross margin
=
Gross profit/Sales
•
Net margin
=
Net profit/Sales
•
ROE
=
Profit after tax and preference dividends/Shareholders’ funds
=
Sales/Capital Employed
=
Net margin × asset turnover
Efficiency ratios • Asset turnover
• •
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ROCE
Receivables days =
Receivables balance/Credit sales
× 100 × 100 × 100 × 100 × 100 × 365
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•
Payables days
=
Payable balance/Credit purchases
•
Inventory days
=
Inventory/Cost of sales
•
Revenue per employee
=
Sales/Number of employees
× 365 × 365 × 100
Liquidity ratios
• •
Current Ratio
=
Current Assets/Current Liabilities
Quick Ratio (acid test) = Current Assets inventory/Current liabilities Gearing ratios = Debt/Equity • Financial Gearing = Debt/Debt + Equity • Financial Gearing Investor ratios Dividend = PAT/Total Dividend Cover Interest Cover = PBIT/Interest EPS = Profit after tax and preference dividends/Number of × shares 100 PE ratio = Share price/EPS
Test your understanding 6
Using the information from the Spartan Inc question above plus the following:
•
Average data for the business sector in which Spartan operates is as follows: – Gearing (book value of debt/book value of equity) 100% –
Interest cover 4 times
–
Current ratio 2:1
–
Inventory days 90 days
Required Analyse and comment on the recent financial performance of the company.
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Forecast ratios In an examination question you may be asked to assess the implications of a proposed financing package and/or strategy.
Test your understanding 7
Using the same question as before – Spartan Inc. Required Calculate the effect on the gearing and interest cover of Spartan Inc. of financing the proposed investment with an issue of loan notes and compare your results with the sector averages.
Expandable text Limitations of ratio analysis
Expandable text Interfirm comparisons
Expandable text Additional question
Investment appraisal ratios
Capital investment appraisal is an analysis of the expected financial returns from a capital project over its expected life.
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chapter 13 It is possible that the examiner may ask you for some basic calculations here including ROCE, payback, NPV and IRR.
Expandable text ROCE and payback
Expandable text NPV and IRR
Test your understanding 8
Explain in what ways your approach to performance appraisal would differ if you were asked to assess the performance of a notforprofit organisation.
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6 Chapter summary
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Test your understanding answers
Test your understanding 1 Strategic and operational decisions The major change in emphasis will be that decisions will now have to be made on a largely commercial basis. Profit and share price considerations will become paramount. Examples of where significant changes might occur are:
•
financing decision: The firm will have to compete for a wide range of sources of finance. Choices between various types of finance will now have to be made, e.g. debt versus equity
•
dividend decision: The firm will now have to consider its policy on dividend payout to shareholders
•
investment decision: Commercial rather than social considerations will become of major importance. Diversification into other products and markets will now be possible. Expansion by merger and take over can also be considered
•
threat of takeover: If the government completely relinquishes its ownership it is possible that the firm could be subject to takeover bids
•
other areas: Pricing, marketing, staffing, etc., will now be largely free of government constraints.
Test your understanding 2 The options for avoiding this deficit.
•
Either find additional funding for the advocacy project (a core activity) in order to ensure that it contributes to core funding, or cut the project down to size so that it is fully funded.
•
Increase the net profitability of the membership income and trust/foundation appeals to ensure that all the core costs are funded, as well as the contribution to the advocacy project.
• •
Increase the net core funding from each of the four current projects. Develop a new project with sufficient contribution to core costs to cover the shortfall, including the funds allocated to the advocacy project.
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Test your understanding 3 Retained earnings – the most important form of finance in practice for both smaller and larger businesses. However, while retained earnings may seem an easy source of finance for a company, there is a danger that if it does not achieve an adequate internal return on these retained earnings, it may become the subject of a takeover bid from another company that considers that it could manage the capital of the business more effectively. This does not apply to Spartan because they do not have sufficient funds to finance the growth. Equity – is the net value of a company after deducting its liabilities from its assets. However, in financing language, equity is usually taken to be the share capital in the business, and a slice of equity can be sold to raise money either to invest in the business or for shareholders to realise some cash for themselves, or a mix of these. Spartan have already issued shares but could release some more. The potential benefits are:
•
raise money without the burden of interest payment or compulsory capital repayment (although dividend payments will be required)
•
Spartan can bring strategic partners into the company, which can help with credibility
•
the new shareholders may well participate in further rounds of financing
•
they can provide expertise, e.g. as nonexecutive directors.
Further sources of equity include:
• •
Personal resources, friends and family.
•
Governmentsponsored funds
Corporate venturing – where a major company invests in a smaller one, to gain access to innovation and ideas.
Grants – Grants are available for all sorts of projects, although the main targets are businesses involved in:
• • • • • •
innovation research export heritage and arts technology and training and those based in ‘disadvantaged’ areas.
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chapter 13 The biggest disadvantage is identifying what grants are available, and completing the paperwork required. Loans – there are many types.
•
Regular institutional loan – from banks, etc. – money is advanced for a specific purpose and is repayable over a fixed period at a fixed or variable rate. The maximum loan amount will be based on available security (often personal) and the ability to ‘service’ (pay) interest and capital repayments. It may be possible to negotiate stepped payments and capital repayment holidays. The lender will want to see credible financial forecasts, especially cash flow projections.
•
‘Soft’ loans – from government sponsored funds – a number of loan funds have been established, financed by a mix of public and private money, to help certain defined industry sectors or regions. These loans are usually unsecured, and the terms are often easier than regular loans.
•
Mezzanine funds – available from various sources including banks, venture capital firms and specialist mezzanine loan providers. This type of debt sits between equity and regular loans (hence the name). The loan is unsecured, and in return for the increased risk the interest rate will be higher and typically the lender will require the right to buy shares in the company on favourable terms (known as ‘equity kicker’, warrants, or share options).
The advantages and disadvantages are outlined below: Advantages
Disadvantages
•
Debt finance is usually • cheaper than equity finance.
Although debt is attractive due to its cheap cost, its disadvantage is that interest has to be paid.
•
Generally, shortterm borrowing (less than one year) is cheaper than longerterm borrowing.
•
If too much is borrowed then the company may not be able to meet interest and principal payments and liquidation may follow.
•
Debt interest is • corporation tax deductible (unlike equity dividends) making it even cheaper to a taxpaying company.
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The level of a company’s borrowings is usually measured by the capital gearing ratio (the ratio of debt finance to equity finance) and companies must ensure this does not become too high.
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•
Debt interest is • corporation tax deductible (unlike equity dividends) making it even cheaper to a taxpaying company.
The level of a company’s borrowings is usually measured by the capital gearing ratio (the ratio of debt finance to equity finance) and companies must ensure this does not become too high.
•
Arrangement costs are • usually lower on debt finance than equity finance and once again, unlike equity arrangement costs, they are also tax deductible.
Many lenders will require assets to be pledged as security against loans – good quality assets such as land and buildings provide security for borrowing – intangible assets such as capitalised research and development expenditure usually do not.
•
With longterm • borrowing, if the borrower does not breach the debt covenants, the finance is assured for the duration of the loan.
This risk is at its highest on overdraft borrowing where the bank can call in the overdraft ‘on demand’.
•
Some types of debt finance are only available to large listed companies.
Outside of equity, loans and grants, the following sources of finance should be considered – although these will not be suitable for Spartan’s investment. Overdraft – a facility to borrow up to a prescribed amount for a defined period (usually one year renewable). Factoring or invoice discounting – a factoring agent, usually a bank subsidiary, pays a company up to 85% of the invoice value when the invoice is originated, i.e. when the goods or services are delivered by the company. The balance is paid, less fees, when the customer settles the invoice. Leasing, HP, contract purchase – all forms of loan where the security given is over the asset purchased.
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Test your understanding 4 Normally, but not invariably, longterm finance is more expensive than shortterm finance. This is because lenders normally perceive the risks as being higher on longterm advances. Longterm finance does, however, carry the advantage of security, whereas sources of shortterm finance can often be withdrawn at short notice. Shortterm loans have to be regularly renewed and the company carries the risk that lenders may refuse to extend further credit. This risk is at its highest on overdraft borrowing where the bank can call in the overdraft ‘on demand’. With longterm borrowing, as long as the borrower does not breach the debt covenants involved, the finance is assured for the duration of the loan. In choosing between shortterm and longterm borrowing, the firm should consider the textbook rule of thumb for prudent financing: ‘finance short term investments with shortterm funds and longterm investments with longterm funds’. Simply, this means use cheap shortterm borrowing where it is safe to do so (investments that are shortterm in nature and hence renewal risk is not a problem) but use longterm finance for long lived investments.
Test your understanding 5
•
Taxation of incomes and company profits, excise, VAT receipts (central government).
• • • • • • •
Sale of gilts (government securities) to investors.
• • •
Funds from central government.
Borrowing from external sources (e.g. issuing Eurobonds). Community charge (local government). User fees (e.g. charge for using a leisure facility). Special charges (e.g. the nuclear levy on electricity bills). Charging overseas users (e.g. universities for overseas students). Charges to private sector (e.g. the NHS charges for using some of its facilities). Issuing municipal bonds (on the money markets). Longterm loan finance (e.g. for local authorities).
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Test your understanding 6 Solution Ratio calculations
ROCE Net profit margin Asset turnover Current ratio Quick ratio Inventory days Receivable days Sales/working capital Debt/equity Interest cover
20X5 20X6 1,750/7,120 24.6% 1,500/7,500 20% 1,750/5,000 35% 1,500/5 30% 5,000/7,120 0.70 5,000/7,500 0.67 2,000/1,280 1.56 2,150/1,150 1.87 1,000/1,280 0.78 980/1,150 0.85 365 × 122 days 365 × 138 1,000/3,000 1,170/3,100 days 12 × 900/5,000 2.2 12 × 850/5,000 2 months months 5,000/720 6.9 5,000/1,000 5.0 3,500/3,620 1,750/380
96.7% % 3,500/4,000 4.6 1,500/400
87.5% 3.75
The return on capital employed of Spartan has declined as a result of both falling net profit margin and falling asset turnover: while comparable with the sector average of 25% in 20X5, it is well below the sector average in 20X6. The problem here is that turnover has remained static while both cost of sales and investment in assets have increased. Despite the fall in profitability, both current ratio and quick ratio have improved, in the main due to the increase in inventoryl evels and the decline in current liabilities, the composition of which is unknown. The current ratio remains below the sector average, however. The increase in both inventory levels and inventory days, together with the fact that inventory days is now 53% above the sector average, may indicate that current products are becoming harder to sell, a conclusion supported by the failure to increase turnover and the reduced profit margin. The expected increase in sales volume is therefore likely to be associated with a new product launch, since it is unlikely that an increase in capacity alone will be able to generate increased sales. There is also the possibility that the static sales of existing products may herald a decline in sales in the future. The decrease in receivables days is an encouraging sign, but the interpretation of the decreased sales/working capital ratio is uncertain. While the decrease could indicate less aggressive working capital management, it could also indicate that trade creditors are less willing to extend credit to Spartan, or that inventory management is poor.
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chapter 13 The gearing of the company has fallen, but only because reserves have been increased by retained profit. The interest cover has declined since interest has increased and operating profit has fallen. Given the constant longterm debt, the increase in interest, although small, could indicate an increase in overdraft finance. Ratio analysis offers evidence that the financial performance of Spartan Inc. has been disappointing in terms of sales, profitability and inventory management. It may be that the management of Spartan see the increase in capacity as a cure for the company’s declining performance.
Test your understanding 7 Suggested solution The current gearing of Spartan Inc. = 100 × (3.5m/4m) = 87.5% Total debt after issuing $3.4m of debt = 3.5m + 3.4m = $6.9m New level of gearing = 100 × (6.9m/4m) = 172.5% Current annual loan note interest = $350,000 (3.5m × 0.1) Current interest on overdraft = 400,000 – 350,000 = $50,000 Annual interest on new debt = $272,000 (3.4m × 0.08) Expected annual interest = 400,000 + 272,000 = $672,000 Current profit before interest and tax = $1.5m Current interest cover = 3.75 (1.5m/0.4m) Assuming straight line depreciation, additional depreciation = $600,000 per year Expected profit before interest and tax = 1.5 + 1.43 – 0.6 = $2.33m Expected interest cover = 3.47 (2.33/0.672) This is lower than the current interest cover and also assumes no change in overdraft interest. Thus, Spartan’s gearing is expected to rise from slightly below the sector average of 100% to significantly more than the sector average. Spartan’s interest cover is likely to remain at a level lower than the sector average of four times, and will be slightly reduced assuming no change in overdraft interest.
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Test your understanding 8 Solution It is generally assumed that the objective of stock market listed companies is to maximise the wealth of their shareholders. This in turn places an emphasis on profitability and other factors that influence a company’s share price. It is true that some companies have other (secondary) aims such as only engaging in ethical activities (e.g. not producing armaments) or have strong environmental considerations. Clearly by definition, notforprofit organisations are not motivated by the need to produce profits for shareholders, but that does not mean that they should be inefficient. Many areas of assessment of profitoriented companies are perfectly valid for notforprofit organisations: efficient stock holdings, tight budgetary constraints, use of key performance indicators, prevention of fraud, etc. There are a great variety of notforprofit organisations; e.g. public sector health, education, policing and charities. It is difficult to be specific about how to assess the performance of a notforprofit organisation without knowing what type of organisation it is. In general terms an assessment of performance must be made in the light of the stated objectives of the organisation. Thus, for example, in a public health service one could look at measures such as treatment waiting times, increasing life expectancy, etc. and although such organisations do not have a profit motive requiring efficient operation, they should nonetheless be accountable for the resources they use. Techniques such as ‘value for money’ and the three Es (economy, efficiency and effectiveness) have been developed and can help to assess the performance of such organisations.
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Strategy and people Chapter learning objectives Upon completion of this chapter you will be able to:
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explain, for organisations in general, how the effective recruitment, management and motivation of people is necessary for enabling strategic and operational success
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describe classical and modern leadership theories and explain, for a given scenario, how appropriate leadership can facilitate strategy formulation and implementation
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explain, for organisations in general, the roles of assessment, appraisal and performance measurement
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describe, for a given organisation, the relationship of performance management to performance measurement (performance rating) and determine the implications of performance measurement for quality initiatives and process redesign
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explain, for organisations in general, the purpose, methods and problems of reward management and reward practices, including how these relate to strategy
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describe the contribution of four different approaches to job design (scientific management, job enrichment, Japanese management and reengineering)
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discuss the tensions and potential ethical issues related to job design in organisations in general
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advise, for organisations in general, on the relationship of job design to quality initiatives, process redesign, project management and the harnessing of ebusiness opportunities
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explain, for organisations in general, the human resource implications of knowledge work and postindustrial job design
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describe, for organisations in general, the emergence and scope of human resource development, succession planning and their relationship to the strategy of the organisation
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describe, for organisations in general, different methods of establishing human resource development
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explain, for organisations in general, the contribution of competency frameworks to human resource development
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explain, for organisations in general, the meaning and contribution of workplace learning, the learning organisation, organisation learning and knowledge management.
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1 Human resources and organisational strategy The strategic role of human resources
People are of central importance in most organisations and their recruitment, management and motivation forms part of the human resource management function. Human resource management (HRM) has been defined as ‘a strategic and coherent approach to the management of an organisation’s most valued assets: the people working there who individually and collectively contribute to the achievement of its objectives for sustainable competitive advantage’ (Michael Armstrong). The aims of HRM are therefore:
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to develop an effective human component for the organisation that will respond effectively to change
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to obtain and develop the human resources required by the organisation and to use and motivate them effectively
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to create and maintain a cooperative climate of relationships within the organisation
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to meet the organisation’s social and legal responsibilities relating to human resources.
Many of the issues covered in this chapter have been met before in paper F1 but have only been tested at a recall level within objective test questions.
Illustration 1 – Human resources and organisational strategy When asked why they value and measure human resources, the four most important reasons given by organisations were as follows.
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The human resource function should be accountable, just like any other function.
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The knowledge and skills of their people are their most important sources of sustained competitive advantage.
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Measurement gives management necessary information about the people resources in the organisation and if the resources are there to support business strategies.
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Measurement helps with strategic planning.
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Integrating HRM into strategic planning Organisations cannot, in every case, simply adjust the staff to match the needs of the corporate plan; the staffing implications of strategic technical change should be part of the corporate planning process, with direct communication between the corporate planners and the HR function. The objectives of an effective human resources strategy will include the following.
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Identifying, in precise terms, the kinds of talent the organisation will need in order to achieve its strategic goals in the short, medium and long term.
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Recruiting an adequate supply of young entrants with the potential to become outstanding performers, allowing for wastage and for the actions of competing organisations.
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Developing people’s potential by training, development and education.
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Motivating the talented personnel to achieve high levels of performance and to build ties of loyalty to the organisation.
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Searching for ways of improving the performance and productivity of the most talented.
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Creating an organisational culture in which talent is nurtured and can flourish and in which different streams of talent can be integrated within a framework of shared values so as to form a winning team.
Retaining as high a proportion as possible of those recruited in this way whose potential is demonstrated in the early years in employment.
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The importance of recruitment Effective recruitment is a key part of the HR function to ensure that individuals are employed with the skills required for the organisation to achieve its strategic objectives. Whatever selection techniques are used, it is important that:
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roles and personnel specifications are defined in relation to the performance required to achieve the organisation’s strategic objectives
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assessment is made against clearly defined criteria selection procedures are reliable and enable candidates to be compared objectively in terms of their skills and likely performance in the role
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the experience of the recruitment process gives candidates a positive view of the organisation; expectations of the work experience created during recruitment will have an impact on the employee’s commitment and motivation.
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Motivation and management Once individuals have been recruited, probably the most important aspect of human management is ensuring that employees are motivated to perform their jobs effectively and do so in accordance with the organisation’s objectives. There are a number of means that organisations use to achieve this, some of which will be discussed further later in this chapter. These means include:
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reward systems development of goals for individuals and groups job design assessment and appraisal training and development.
Test your understanding 1
Complete this definition of HRM. HRM is ‘a ___________ and coherent approach to the management of an organisation’s most valued assets: the __________ working there who individually and _________ contribute to the achievement of its objectives for __________ _________ _________’.
2 Leadership Theories of leadership Classical theories of leadership Classical theories of leadership, which you should be familiar with from your previous studies, can be considered as falling into four main categories.
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Trait or personal characteristics, which see the individual as more important than the situation.
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Style theories, which are based on the assumption that the leadership style of a manager will affect the motivation of employees.
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Contingency (or contextual) approaches that take into account other variables such as the nature of the group in which the leader operates and the position of the leader within the group.
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Situational theories that look at situations where leaders are shown to be effective and considered the actions of leaders and the context in which they led in order to suggest the appropriate style to match the requirements of the task, the group and the individuals.
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Recent approaches to leadership More recent approaches to leadership have characterised leaders in one of two ways:
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transformational or charismatic leaders who provide a vision, inspire people to achieve it by instilling pride and gaining respect and trust. These leaders appear to be particularly effective in times of change and uncertainty
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transactional leaders who focus on managing through systems and processes. These leaders are likely to be more effective in securing improvement in stable situations.
Illustration 2 – Leadership Likert Likert’s book New Patterns Of Management distinguished between four key styles or ‘systems’ of leadership. System 1 Exploitative autocratic Here the leader has no confidence or trust in subordinates, imposes decisions, never delegates, motivates by threat, has little communication with subordinates and does not encourage teamwork. System 2 Benevolent authoritative Under this system the leader has only superficial and condescending trust in subordinates, imposes decisions, never delegates, motivates by reward and, though he sometimes will involve others in solving problems, is basically paternalistic.
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System 3 Participative The leader has some incomplete confidence in subordinates, listens to them but controls decision making, motivates by reward and a level of involvement and will use the ideas and suggestions of subordinates constructively. System 4 Democratic The democratic leader has complete confidence in subordinates who are allowed to make decisions for themselves. Motivation is by reward for achieving goals set by participation and there is a substantial amount of sharing of ideas and opinions and cooperation. Likert’s research shows that effective managers are those who adopt either a System 3 or a System 4 leadership style. Both are seen as being based on trust and paying attention to the needs of both the organisation and employees. This is an example of a trait theory.
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Test your understanding 2
Discuss any manager you feel is visionary. State why you view them in this way.
Key leadership traits for strategy implementation and change There is no definitive model to describe what makes a leader effective, but there are a number of traits that have been identified as important in strategy implementation and change.
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Vision, which provides clarity about direction and what needs to be done to get there.
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Communication – leadership is predominantly about communication. Leaders need to be those who listen and can see another’s point of view, enabling them to gain trust.
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Passion and motivation – the most effective leaders inspire others to work harder through their passion and making others see the purpose and value in what they do.
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Flexibility – leaders need to be able to tailor their leadership style to the requirements of the context in which they are leading.
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3 Assessment, appraisal and performance measurement Assessment and appraisal Assessment and appraisal systems have been developed by organisations as important tools in the pursuit of competitive advantage. These activities provide information for decision making for performance improvement and change.
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Assessment is the process of collection and review of data about an individual’s current work behaviour and performance, and provides the basic data for the appraisal.
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Appraisal is the analysis of an individual’s overall capabilities and potential.
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Standards and criteria used in assessment and appraisal should be based on performance requirements of the organisation’s strategic objectives.
The appraisal process is illustrated in the model shown below:
The purpose of appraisal The most usual rationalisation and justification for appraisal is to improve individual performance. However, there are a number of other reasons, such as to:
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clarify expectations of performance, review past performance and help improve current performance
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identify problems in performance and plan remedial action
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assess future potential and promotability
assess training and development needs and help in the evaluation of training programmes assist career planning decisions improve motivation and morale determine rewards.
Barriers to the appraisal process Lockett suggests that appraisal barriers can be identified as follows: Appraisal is confrontation
Differing views regarding performance Feedback is biased Feedback is badly delivered Assessment is based on yesterday Disagree over prospects and solutions
Appraisal is judgement
Appraisal is onesided Appraisal is imposed
Appraisal is chat
Lack of will from either party An unproductive conversation No outcomes set
Appraisal is bureaucracy
Form filling and depersonalised No real purpose or worth
Appraisal as an event
A traditional ceremony No purpose or worth
Appraisal as unfinished business
Frustration at limited appraisal time No belief that issues will be followed up
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Key factors to counter these claims will therefore include the need to ensure:
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relevance fairness serious intent cooperation efficiency.
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Performance management Performance management systems are the means used by organisations to create a link between HRM and strategic direction. Performance management:
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provides a means by which strategic goals are linked to critical success factors and then to department, team and individual goals
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involves the establishment of performance targets at all levels related to the achievement of strategic objectives
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should include continuous review of actual performance and targets
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may include a number of different activities such as goal setting, personal development plans and the use of development centres.
should support performance improvement through the identification of development and training needs
Test your understanding 3
Identify six criticisms that are made of appraisal systems.
4 Performance measurement and performance management Measuring performance In addition to establishing organisational and individual objectives, actual performance needs to be measured. An effective performance management system should be reliable, objective and use measures that are seen as achievable and relevant to the needs of the organisation. There are a number of different ways of carrying out performance rating, that is the measurement of individual performance.
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Employee ranking – employees ranked on the basis of overall performance.
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Rating scales – comparing an individual’s performance with a standard in a number of different areas.
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Checklists – choosing the most appropriate description of performance with a list of possible statements.
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Critical incident method – focusing on particular incidents as an indicator of performance.
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Free reporting – completion of a written report on each employee.
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Appraisal interviews.
Achievement against objectives. Performance contract – comparison against objectives. Behaviourally anchored rating scales (BARS) using measurement scales that are directly related to the job being appraised.
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Performance measurement and improvement initiatives An effective management system is key to ensuring that new process changes and quality improvements are achieved. Goals and measures can be used to ensure that processes work as they should, but process redesign and quality improvement plans need to incorporate plans for changes to the performance measurement system, reflecting:
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new output measures new skills and competences required changes to roles and job descriptions changes to responsibilities.
Test your understanding 4
What are the main requirements of a performance measurement system?
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5 Reward practices and management The purpose of reward systems The reward system of an organisation comprises the monetary and non monetary payments given to employees in return for work performed. Reward systems can have a significant impact on recruitment, retention, the motivation of employees and the improvement of performance. The internal or managerial aims of a reward system are:
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to provide a fair and consistent basis for motivating and rewarding employees
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to motivate staff to maximise their performance
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to recognise the various factors apart from performance such as job/role size, contribution, skills and competence
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to control salary costs.
to further company objectives through an externally based, fair system to reward performance by progression or promotion through developed pathways
Methods of reward management Categories of reward Rewards to employees may be made up of a number of different components, which can be considered as falling into three categories.
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Basic pay – the wage or salary that forms the base level of pay for a particular job. This may be determined in a number of ways such as job evaluation or market rates.
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Performancerelated pay. Benefits, or indirect payments – a wide range of nonmonetary rewards, such as health insurance or company cars. These may be the same for all employees or be based on a ‘cafeteria’ style of benefits, chosen as appropriate by individual employees.
Illustration 3 – Reward practices and management Example of cafeteriastyle benefits Some firms are now offering employees a choice of benefits. As well as an array of fixed benefits, schemes offer the flexibility to choose extra services that are relevant to your life. And if your situation changes so can your benefits, as each year, you can review your selections.
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cover for personal private medical expenses a core holiday entitlement with the option to buy further days life assurance (death in service) personal accident insurance income protection insurance (after one year’s service).
Additional options may include.
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Pension. Discounts on lease cars and car finance packages. Travel insurance. Health screening. Critical illness insurance. Dental insurance. Tax effective childcare vouchers. Computers@home schemes for personal use. Season ticket loan.
Levels of reward Rewards can be given at different levels, all of which will have a different impact on behaviour.
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Individual rewards – such as salary – that aim to influence individual behaviour.
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Team rewards, to encourage cooperation and collaboration within a team.
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Group or organisation level rewards that aim to encourage behaviour in line with organisational goals.
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Issues to consider when designing a reward system Each business strategy needs to be supported by an appropriate reward system. A number of issues need to be addressed, including.
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What behaviour the organisation wants to encourage – for example is the scheme one that should encourage individual performance, or teamwork, which might require the use of a group incentive scheme?
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How does the scheme reflect the organisation’s strategic objectives and critical success factors? For example, quality initiatives are often undermined by reward schemes linked to short term profitability.
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Are there organisational constraints for the scheme, such as funding? This may be a particular issue for organisations competing for skilled workers, where affordability may limit the level of skilled staff who can be employed.
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The rewards offered by competitors. Consistency with government policy or legislation. The drivers of change within the organisation. For example, business process redesign may result in new job roles and responsibilities. Similarly a switch to increasing online sales could require a rethink of how sales staff should be rewarded.
Illustration 4 – Reward practices and management Changing a reward system to support strategic change A car factory is undergoing reorganisation to increase its flexibility and improve its speed of response to customer requirements. This reorganisation includes a move from traditional assembly lines to cellular justintime manufacturing and the implementation of a quality improvement scheme using quality circles for problem solving. The company decides to make a number of changes to its reward system, including:
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abandoning the incentive scheme based on individual piecework payments that encouraged output regardless of whether it was required by the next process
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pay all staff a weekly or monthly salary regardless of output introduce a suggestion scheme for teams involved in quality circles, paying a reward to the team in proportion to the savings from quality improvements made as a result of their work.
Test your understanding 5
What are the main purposes of reward systems?
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Reward techniques Many writers emphasize the importance of the ‘internal equity’ of pay relationships between different jobs. It is translated into practise by comparing jobs and individuals in terms of their relative contributions to organizational goals and objectives. This involves three ‘reward techniques’:
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job analysis looking at the tasks, responsibilities and context of a specific job
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job evaluation determining the relative worth of jobs through ranking, job grading, point methods
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appraisal evaluating how well the individual has performed the job.
Aligning reward practises with strategy As well as ensuring that reward schemes are internally consistent, they must produce behaviours and competencies that give the organization the CSFs needed for chosen strategies.
Test your understanding 6
Consider the following two organisations: Company A
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Manufacturers high quality, customised components for the aerospace industry.
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Manufacturing is focussed on selfmanaged teams with workers rotating through the various jobs involved within the teams.
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Workplace learning is encouraged. Staff turnover is extremely low.
Company B
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Manufacturers fish fingers on a conveyorbelt production line. The work is monotonous and requires little training. Staff turnover is extremely high.
Suggest reward packages for each.
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6 Job design
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Job design and strategic change In implementing any strategic change such as quality initiatives or the implementation of ebusiness there are implications for the content and nature of jobs that will need to be considered as part of the implementation plan.
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The core issues of job design such as control, skill and knowledge remain the same, but need to be considered in a changing environment.
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Such initiatives should have an impact on all parts of the organisational structure. Traditional job design has focused on manual or lessskilled work, but needs to have a broader focus.
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The increasing use of information technology and ebusiness has a tendency to lead to more streamlined, flatter structures, which will have implications for the nature of jobs.
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Organisations and work are becoming more knowledgeintensive (this will be discussed further, later in this chapter).
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Changes to and increased complexity of relationships within the organisation and with suppliers and customers mean that staff need a broader understanding of business.
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If projects to implement change are to be successful, changes to job design need to be considered as part of the project planning phase, to ensure that the response and behaviour of individual staff supports the strategic objectives.
Team working Crossfunctional teams often drive initiatives such as quality improvement, process reengineering and the development of ebusiness development. This is often through the formation of selfmanaged work groups who assume greater autonomy and responsibility for the effective performance of the work. Selfmanaged work groups have a number of key features.
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Specific goals are set for the group but members decide the best means by which these goals are to be achieved.
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Group members have greater freedom and choice, and wider discretion over the planning, execution and control of their own work.
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Collectively, members of the group have the necessary variety of expertise and skills to undertake successfully the tasks of the group.
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The level of external supervision is reduced and the role of supervisor becomes more one of giving advice and support to the group.
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Feedback and evaluation are related to the performance of the group as a whole.
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Test your understanding 7
Identify three reasons why job design needs to be considered as part of the implementation planning of ebusiness developments.
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7 Knowledge workers Arrangements of knowledge workers Recent years have seen the emergence of ‘knowledge work’ where work is no longer about the manufacture of products but about the development of intangible assets, and where knowledge is the main asset of organisations. Knowledge workers are not involved in routine production or administrative functions but provide expertise in a defined area. This expertise is critical to solving complex problems and through this delivering competitive advantage. Examples of knowledge workers include:
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doctors engineers academics lawyers scientists technologists.
The role of knowledge workers Collaboration on defined projects is a key aspect to the knowledge worker’s role. Other elements to the role are:
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ability to access corporate data through webbased services and corporate databases
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a roving role across departmental boundaries a temporary projectbased role high levels of limited scope, massive depth expertise.
Implications for human resources management Implications for HRM of the move towards knowledgebased organisations are:
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employee selection is on the basis of skill and competences rather than application to a distinct task
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employees require input to their own development, skills and careers
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temporary, contractorbased roles
the development of separate and relevant incentive schemes based on a variety of individual factors increasing numbers of employees based in remote locations, and the emergence of flexible working schemes.
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Illustration 5 – Knowledge workers Railway technology makes great use of knowledge workers whom they describe as ‘associates’. Associates are selected based on their qualifications, skills and experience and are matched to a variety of roles and tasks at any one time. Associates are employed on a freelance basis and often work remotely.
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Test your understanding 8
Discuss some of the problems that might arise for traditional managers in dealing with knowledge workers.
8 Human resource development The emergence of human resource development Human resource development encompasses the activities that are concerned with developing the skills and abilities of the people within an organisation in order to ensure its success. Today, human resource development is seen as more than just a training activity, and its scope has been extended so that:
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people are seen as a major source of competitive advantage, and their training and development is seen as an investment, not a cost
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learning is seen as essential and embedded in the organisation as a means of coping with change and ensuring that strategic objectives are met
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employees have the expectation that they will learn and change and retrain as necessary as strategy demands
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the development and training of their staff is seen as a key part of a manager’s role
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changes outside the organisation are reflected in changes to training and development needs
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human resource implications are considered as part of strategic planning.
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Succession planning One of the most important aspects of human resource development is ensuring the management succession. Bringing in top managers from outside the company can improve the breadth of experience of the top management team, but people at the top who have come from within the business bring specialist knowledge of different aspects of the firm itself and provide an inspiration for more junior managers who can aspire to the same position. Effective succession planning:
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identifies people with management potential early in their careers
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longterm plans based on identifying: – for each post, a list of perhaps three potential successors
provides training integrated with planned career patterns including a number of development moves to widen experience. However, care must be taken that grooming the chosen few does not take precedence over everyone else’s career to avoid resentment being caused and the company missing out on spotting late developers
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for each person (at least from a certain level upwards), a list of possible development moves
provides contingency plans for a successor for any post that becomes suddenly and unexpectedly vacant (e.g. through death).
Illustration 6 – Human resource development Many organisations have a ‘fast track’ whereby potential future senior managers are identified early in their careers and given work and training opportunities in an attempt to help them achieve their potential.
Test your understanding 9
Outline the steps taken by an organisation that you are aware of to ensure management succession.
Establishing human resource development Most organisations establish human resource development in one of two ways.
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Systematically, according to the traditional model of training. Using a more integrated approach more closely linked to strategy development.
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is one in which training and development activities are planned based on needs analysis, implemented and then evaluated at the end
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includes varied training activities that are often offthejob, and may use a variety of techniques and technologies such as elearning and distance learning
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has contributed to the development of training as a profession may be less effective for organisations in a changing environment where objectives are less clear.
Illustration 7 – Human resource development The training department of a large public sector organisation uses the following model to establish its human resource development:
Test your understanding 10
Discuss the advantages of the model used in the example above – when might it not be sufficient?
The integrated approach More recently, organisations facing rapid change have begun to develop an approach that is more directly integrated with strategy, to ensure that the organisation’s staff are equipped to meet the challenges required by the strategy. It is an approach in which:
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a culture of learning is created within the organisation that is reflected in its systems and processes
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close links are made between HRM and key activities within the organisation such as strategy development
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the development of staff is seen as a management responsibility
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use is made of competency frameworks that are developed to identify key skills and behaviour needed to meet strategic objectives.
development activities such as coaching and mentoring are established as part of HRM
9 Competency frameworks Competences
Competences are the critical skills, knowledge and attitude that a jobholder must have to perform effectively. A competent individual can perform a work role in a wide range of settings over an extended period of time. Competences:
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are expressed in visible, behavioural terms and reflect the main components of the job (skills, knowledge and attitude)
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must be demonstrated to an agreed standard and must contribute to the overall aims of the organisation.
Most competency frameworks cover the following catagories:
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communication skills people management team skills customer service skills resultsorientation problemsolving
Illustration 8 – Competency frameworks A research analyst working for the government might have the following factors within their competency framework: Delivery skills
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Critical analysis and decision making Constructive thinking Professional expertise
Interpersonal skills
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Developing constructive relationships Communicating with impact
Leadership and management
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Leading and directing
Each of these competences will then be supported by a high level description. For example, "Learning and improving" could be described as follows:
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Acknowledges own development needs and seeks new skills, knowledge and opportunities for learning;
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Learns from others; adapts quickly and effectively to new people, situations and task demands;
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Operates effectively in a range of roles and contexts including times and situations of uncertainty.
Test your understanding 11
List some (of the many) competences an accountant may have.
The use of competency frameworks Organisations are increasingly making use of competency frameworks as a way to link HRM processes to the skills and behaviour required to meet strategic objectives. Systems using competency frameworks may include many components each linking to a different aspect of human resource activity within an organisation:
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to provide an analysis of the behaviour needed to achieve a given strategy
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recruitment – as a basis for person specifications and as a basis for comparison of applicants during selection
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identifying training and development needs to develop people to a level of performance expected at work
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managing performance, focusing on what people do at work and how well they do it, often as a basis for appraisal systems such as behaviourally anchored rating scales
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benchmarking.
A key point here is that the same competency framework can be used for job design, recruitment, ongoing performance appraisal and the design of reward systems.
The process for assessing competencies For any competencebased system the process is the same:
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10 Workplace learning, the learning organisation, organisation learning and knowledge management Workplace learning As has been discussed earlier, in human resource development learning is seen as key in ensuring competitive advantage. The concept of workplace learning sees the organisation as a unit of learning in which:
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learning is of strategic importance and is seen in a wider context by managers and staff
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links are made between learning and other parts of the organisation, such as training and information systems, and training and organisational development.
The learning organisation The idea of the ‘learning organisation’ emerged towards the end of the twentieth century. Pedler, Burgoyne and Boydell are the main proponents in the UK of the ‘learning company’, which they define as ‘an organisation that facilitates the learning of all its members and continuously transforms itself’.
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In learning organisations, testing and experimentation are encouraged, because the organisation wants to find new answers, and recognises that failed answers are as important as successful ones.
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Actions have two purposes – to resolve the immediate problem and to learn from the process.
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Learning organisations are capable of adapting, changing, developing and transforming themselves in response to the needs, wishes and aspirations of people, inside and outside.
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Selfdevelopment and actionlearning are also foundations of the learning organisation: as the organisation learns from the actions that it carries out, so does the individual.
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Illustration 9 – The learning organisation Woods Ltd provides all staff with ‘workstime’ to update the company’s database on customers, competitors and other industry information and to allow them to keep abreast of any additions their colleagues may have made.
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Organisation learning The idea of organisation learning is a further development of the concept of workplace learning. It is concerned not with the learning of individuals but about how learning takes place at the organisational level – that is how the organisation as an entity itself learns new ways of doing things.
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The organisation needs to be seen as organic, and learning in the same way individuals do.
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The organisation develops through collective learning from interactions within the organisation.
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Organisation learning is mainly informal and about the organisation’s response to given events and circumstances. This depends on the culture of the organisation and the groups within it.
Knowledge management Organisations are becoming more knowledgebased. As a result, success becomes more dependent on how effectively information is turned into useful knowledge that is then applied to products and processes.
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Knowledge management is concerned with how to acquire, share, retain and use information, knowledge and experience, and how to build on and develop it.
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The knowledge may be ‘explicit’ and formal such as the content of reports, spreadsheets or manuals, or ‘tacit’, which is informal, not written down, and includes knowledge, the understanding of good practice and management skills. Both types of knowledge need to be managed.
Implementing knowledge management within an organisation Effective knowledge management involves both formal and informal processes and has implications for the organisational structure if sharing of knowledge is to be achieved, with:
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commitment from senior management to establishing a culture where the sharing of knowledge is encouraged and supported
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appointment of staff to manage the process
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a flatter, decentralised structure so that decisions can be taken close to where key knowledge is located
movement of individuals between functions and divisions to enable knowledge to be shared and to encourage the development of informal networks
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the use of technology to support knowledge management such as – email to facilitate the exchange of information between individuals –
intranets to enable access to and exchange of information
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datawarehousing to store and make available large amounts of information
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decisionsupport systems that make use of existing knowledge.
Test your understanding 12
What is the common factor underpinning concepts such as workplace learning, the learning organisation, organisation learning and knowledge management?
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11 Chapter summary
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Test your understanding answers
Test your understanding 1 HRM is ‘a strategic and coherent approach to the management of an organisation’s most valued assets: the people working there who individually and collectively contribute to the achievement of its objectives for sustainablecompetitiveadvantage’.
Test your understanding 2
Test your understanding 3 Appraisal is confrontation, e.g. feedback biased or badly delivered. Appraisal is judgement, e.g. imposed or onesided. Appraisal is chat, e.g. just a conversation with no useful outcomes. Appraisal is bureaucracy, e.g. just a formfilling exercise. Appraisal is an event, e.g. a ritual, traditional ceremony with no real point. Appraisal is unfinished business, e.g. not enough time given to it, issues unlikely to be followed up.
Test your understanding 4
• • •
Reliable. Objective. Use measures that are seen as achievable and relevant to the needs of the organisation.
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Test your understanding 5 To provide a fair and consistent basis for motivating and rewarding employees. To motivate staff to maximise their performance. To further company objectives. To reward performance by progression or promotion. To recognise the various factors apart from performance such as job/role size, contribution, skills and competence. To control salary costs.
Test your understanding 6 Company A: Company A is pursuing a competitive strategy of differentiation and CSFs will include highly skilled, motivated workers. A reward package needs to support a highcommitment HR strategy and could thus include the following.
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Base salary + additional pay if employees learn new skills (‘payfor knowledge’).
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Profit sharing based on company profits. Benefits package.
Company B: Company B is probably pursuing a costleadership strategy and so the CSF is low cost. This can be achieved by using lowskilled employees with managers controlling the speed of the conveyor belt (and hence productivity). Unskilled workers are easy to recruit, so the high turnover of staff would not be viewed as a problem. A reward package here will support a lowcommitment HR strategy involving:
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workers paid on an hourly rate set at or just above the minimum wage
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no other benefits or profit share.
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Test your understanding 7
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These initiatives have an impact on all parts of the organisational structure.
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Ebusiness has a tendency to lead to more streamlined, flatter structures, which will have implications for the nature of jobs.
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Organisations and work become more knowledgeintensive. The nature of the relationships within the organisation and with suppliers and customers changes.
Test your understanding 8 Potential problems for traditional managers in dealing with knowledge workers include:
• • • • •
difficulty in measuring output and quality staff will require a degree of autonomy need for individual methods of assessment and reward uncertainty and change in makeup and numbers of staff feelings of lack of control.
Test your understanding 9
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Test your understanding 10 The model would allow a manager to:
• • • • • • •
assess job performance measure performance before and after the training check the effectiveness of the quality check the quality of the training maintain records of job performance and training note areas of outstanding achievement and those of problems feed back to staff on their performance.
The above might not be sufficient when there is rapid change – for example in a public sector organisation a change of political power may mean that the perceived needs and required outputs of the organisation have changed.
Test your understanding 11 The competences an accountant may have include the following.
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Skills –
Numeracy
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Literacy
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IT literacy
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Bookkeeping, etc.
Knowledge –
FRS, IAS, etc.
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Group accounts, partnership accounts
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Hedges, BlackScholes model, etc.
Attitude – Contentious –
Dynamic, etc.
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Test your understanding 12 The concept underlying these techniques is that learning is of strategic importance to an organisation and needs to be seen in its widest context by staff and management. It also needs to be linked to all parts of the organisation.
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Strategic development and managing strategic change Chapter learning objectives Upon completion of this chapter you will be able to:
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describe the concepts of intended and emergent strategy (including how these relate to unrealised and realised strategies) and how these can arise
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describe how process redesign, quality initiatives and e business can contribute to emergent strategies for an organisation
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describe, with the use of a diagram, what strategic drift is and how it can arise
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describe the types of strategic change in terms of a matrix of nature of change (incremental/big bang) and scope of change (realignment/transformation)
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determine the changes that might be needed in an organisation in terms of the cultural web (symbols, stories, rituals, control systems, structure, power)
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explain the reasons for resistance to change typically found in all organisations
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advise on which of the following leadership styles: – education and communication –
collaboration/participation
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intervention
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direction
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coercion/edict
might be suitable for specific change environments
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explain for an organisation the roles of strategic leadership, middle managers and outsiders 353
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describe the main methods that can be used to manage strategic change.
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1 Patterns of strategy development Intended and planned strategies
An intended strategy could be defined as ‘a strategy whose objectives had been defined in advance and whose main elements had been developed before the strategy commenced’.
It is a strategic planning system – a formal planned systematic approach to strategy formulation and implementation (the rational model of strategy making met in chapter 1). As discussed in chapter 1, the rational approach involves the following steps. (1) Strategic analysis. (2) Strategic choice. (3) Strategic implementation. For intended strategies one would expect each stage to be completed before the next starts. The benefits of a strategic planning system are as follows:
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it can provide a structured means of analysis and thinking about complex strategic problems
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managers will be required to question and challenge the received wisdom they take for granted
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it can encourage a longerterm view of strategy than might otherwise occur
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it can be used as a means of control by regularly reviewing performance and progress against agreed objectives or previously agreed strategic direction
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it can be a useful means of coordination e.g., by bringing together the various SBU strategies within an overall corporate strategy, or ensuring that resources within a business are coordinated to put the strategy into effect;
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it may help to communicate the intended strategy it can be used as a way of involving people in strategy development, therefore perhaps helping to create ownership of the strategy.
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Strategic development and managing strategic change Realised and unrealised strategies
When planned strategies are not realised it is often because events develop in unexpected ways:
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the organisation’s underlying assumptions turn out to be invalid
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the organisation’s internal environment changes.
the pace of development overtakes it changes in the organisation’s external environment, e.g. changes in the market for the goods and services that the firm produces and in the nature of the competition facing the company
Several theorists have recognised a problem with this static model: it is not how it is done in real life. They believe that strategy is actually a dynamic and interactive process. Henry Mintzberg made a distinction between deliberate strategy and emergent strategy. An emergent strategy is a set of actions that is consistent over time, has not been stated in a formal plan and has developed or emerged outside the formal plan and between planning reviews. Mintzberg claims that emergent strategies:
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originate not in the mind of the strategist, but in the interaction of the organisation with its environment
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Resource allocation Joseph Bower took this one step further. His views are that not only are strategic decisions made incrementally rather than as part of a grand unified vision but there are a multitude of small decisions made by numerous people in all sections and levels of the organisation. Bower questioned how a strategy is actually made.
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Is strategy a coherent plan conceived at the top by a visionary leader?
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Are there forces that shape strategy in unintended ways?
Is it formed by a series of smaller decisions, not always reflecting what top management has in mind? Is it made by company managers across the several levels of an organisation?
Organisations of any size are built around a series of SBUs, and the bigger the company the more responsibility in those areas. Sometimes the resource allocation process is a multilevel process in that the managers in the middle and at the operating end have just as big an impact on strategy as corporatelevel managers. This can include internal reporting structures and incentive systems, but it can also reflect external factors such as capital markets and customers. Bower looked at:
• • • •
what those people actually do which ideas they chose to bring forward which options for using resources were developed and selected which of those get funded?
His overall conclusion was that strategic initiatives often develop deep in the hierarchy and are then championed, or even given impetus, by middlelevel managers who seek the authorisation of senior executives.
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Resource allocation is a process of study, bargaining, persuasion and choice spread over many levels of the organisation and over long periods of time.
Illustration 1 – Patterns of strategy development One of the more powerful examples of how operating managers can have a huge impact on the reallife strategy of the firm is Intel. While the corporate office continued to conceive of Intel as a memory chip company, an operating rule in their manufacturing organisation (to maximise gross margin per wafer of square inch) meant that the manufacturing floor was increasingly allocating more space to microprocessors. As that more profitable market grew, Intel became a microprocessor company, not a memory company. These operating level decisions changed the de facto strategy of the firm prior to the corporate office’s conception of the company strategy.
Cultural and political influences The rational strategic planning process has also been criticised because it ignores the effects of:
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cultural influences in maintaining strategic stability and sometimes resisting strategic change
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the power structure within the organisation the effect of politics and the relative influence on the decisionmaking of different individuals and groups.
2 Strategic innovation Strategic innovation is the creation of growth strategies, new product categories, services or business models that change the game and generate significant new value for consumers, customers and the organisation. Mintzberg and others are of the opinion that deliberate strategy focuses on control, while emergent strategy emphasises learning – there are many different ways that organisations can learn to add value to their product or service through:
• • •
process redesign quality initiatives ebusiness.
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Illustration 2 – Strategic innovation Ford Ford redesigned their business and manufacturing process from just manufacturing cars to manufacturing quality cars, where the number one goal is quality. This helped Ford save millions on recalls and warranty repairs. Ford has accomplished this goal by incorporating barcodes on all their parts and scanners to scan for any missing parts in a completed car coming off the assembly line. This helped them guarantee a safe and quality car. Swatch Swatch reduced costs with ultrasonic welding that eliminated the need for screws to close watch casings. The company also simplified the manufacturing process, fully mechanising it. The net result was the lowest price/lowest cost structure in the world for a fine watch. Heineken Heineken and Krups Beer Tender is an example of cobranding – a type of BPR. The concept comprises of a professional beer tap and proprietary, compact 4litre Heineken kegs for the home, cocreated by Heineken and Krups. In the first week after being launched in The Netherlands, Heineken sold 3,000 taps, and since then, according to a spokesperson for the company, sales have surpassed even Heineken’s ‘hype scenario’. Heineken now plans to sell the appliance in other countries as well. Waterstones Waterstones, the booksellers, have branches all over the country but in 2001 they formed a strategic alliance with Amazon for online sales, and the website for both is now http://www.amazon.co.uk.
Expandable text Emergent strategies and quality initiatives
Expandable text Emergent strategies and ebusiness
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Strategic drift Strategic drift describes a situation where the organisation’s strategy gradually, if imperceptibly, moves away from the forces at work in its environment.
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The organisation takes a series of logical, incremental steps that were part of its plan to change ahead of the market and develop a competitive advantage.
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The rate of change in the market place speeds up, and the firm’s incrementalist approach is not enough to maintain its advantage, and it is left behind.
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Faced with a stimulus for action, managers may seek to extend the market for their business, but may assume that it will be similar to their existing market, and therefore set about managing the new venture in much the same way as they have been used to.
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If this is not successful, strategy development is likely to go into a state of flux, with no clear direction, further damaging performance.
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Eventually transformational change is required if the demise of the organisation is to be avoided.
Transformational change tends to occur when performance has fallen off significantly, i.e. in times of crisis.
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3 Strategic change Types of strategic change Change can be classified by the extent of the change required, and the speed with which the change is to be achieved: Types of change
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Transformation entails changing an organisation’s culture. It is a fundamental change that cannot be handled within the existing organisational paradigm.
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Realignment does not involve a fundamental reappraisal of the central assumptions and beliefs.
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Evolution can take a long period of time, but results in a fundamentally different organisation once completed.
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Revolution is likely to be a forced, reactive transformation using simultaneous initiatives on many fronts, and often in a relatively short space of time.
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Illustration 3 – Strategic change Strategic change is by definition farreaching. We speak of strategic change when fundamental alterations are made to the business system or the organisational system. Adding a lemonflavoured Coke to the product portfolio is interesting, maybe important, but not a strategic change, while branching out into bottled water was – it was a major departure from CocaCola’s traditional business system.
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Illustration 4 – Strategic change Ise Jingu is Japan’s most sacred Shinto shrine and in the eyes of many also its most aesthetically pure and serene one. The shrine compound consists of more than 200 buildings that are constructed using 14,000 Japanese cedar wood logs, special Kaya straw and not a single nail. Every 20 years, Ise Jingu is completely razed to the ground and the priests move to an exact replica that has been built in the meantime on a parallel site. Here they will stay for the next 20 years, until it is time to move back again. In 1993, the shrine was moved for the 61st time since the year 690, a ceremony that has been maintained with only one exception, during Japan’s wartorn 16th century. Why tear down such elaborate structures only to rebuild exact replicas? The high priests of Shinto realised at the time, that the only way to maintain the knowhow for constructing the shrine was to rebuild it once every 20 years, thus handing down the skills from one generation to the next. By being continuously rebuilt, Ise Jingu remains eternally young – visitors enter brand new buildings that are 1,300 years old. The symbolic importance of this ritual reaches very deep. As with the construction knowhow of the shrine, insight into the Shinto belief system must also be passed on to the young. By making each new generation ‘rebuild’ it, the Shinto belief system evolves successfully with the challenges and opportunities of the present day, without changing what is at its core.
Test your understanding 1
Briefly explain the four types of strategic change in an organisation.
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Cultural web
The cultural web was devised by Gerry Johnson as part of his work to attempt to explain why firms often failed to adjust to environmental change as quickly as they needed to. He concluded that firms developed a way of understanding their organisation – called a paradigm – and found it difficult to think and act outside this paradigm if it were particularly strong.
Expandable text The different elements of the cultural web
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Illustration 5 – Strategic change A cultural web for a local government organisation could look like the following:
The workshop concluded that the 'culture was managing the strategy'. It was therefore very difficult to develop a strategy that crossed all departments and that focussed on local issues.
Test your understanding 2
Outline the cultural elements of a statecontrolled health service provider in a cultural web.
Resistance to change Resistance to change is the action taken by individuals and groups when they perceive that a change that is occurring is a threat to them.
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Resistance is ‘any attitude or behaviour that reflects a person’s unwillingness to make or support a desired change’.
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Resistance may take many forms, including active or passive, overt or covert, individual or organised, aggressive or timid. For each source of resistance, management need to provide an appropriate response, e.g.:
Source of resistance
Possible response
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The need for security and the familiar
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Having the opinion that • no change is needed
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Poor timing Trying to protect vested interests
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Provide information and encouragement, invite involvement Clarify the purpose of the change and how it will be made Demonstrate the problem or the opportunity that makes changes desirable
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The change kaleidoscope (Balogun and Hope Hailey) For change to be successful, implementation efforts need to fit the organisational context. There is no simple ‘off the shelf’ approach that will work for all organisations. The change kaleidoscope was developed by Julia Balogun and Veronica Hope Hailey to help managers design such a ‘context sensitive’ approach to change.
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The kaleidoscope has three rings:
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The outer ring relates to the wider strategic change context.
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The inner circle gives a menu of choices and interventions (‘design choices’) available to change agents.
The middle ring relates to specific contextual factors that need to be considered when formulating a change plan.
Contextual features • Time – is there time for longer term strategic development or does the firm have to react quickly to a crisis?
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Scope – how much of the organisation will be affected? Is the change best described as realignment or transformation?
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Preservation – which aspects of working, culture, competences and people need to be retained?
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Diversity – the need to recognise that different departments (e.g., marketing and RnD) may have different subcultures.
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Capability – whether abilities exist to cope with the change. These can be on an individual, managerial or organisational level.
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Capacity – are resources (e.g. money, managerial time) available to invest in the change process?
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Readiness – are staff aware of the need for change and are they committed to that change?
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Power – how much authority and autonomy do change agents have to make proposed changes?
Each of these factors can be assessed as positive, negative or neutral in the context of change. Positive features facilitate change and negative ones restrict change. Design choices Design choices represent the key features of a change management approach:
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Change path – clarifying the types of change in terms of timescales, the extent of change and the desired outcomes.
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Change start point – where the change is initiated (e.g. topdown or bottom up).
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Change style – which management style should be adopted (e.g. collaborative, participative, directive or coercive)?
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Change interventions – which mechanisms should be deployed (e.g. education, communication, cultural interventions)?
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Change roles – assigning roles and responsibilities (e.g. leadership, use of consultants, role of change action teams).
Illustration 6 – Strategic change Glaxo Glaxo Smith Kline (‘Glaxo’) is often quoted as an example of a firm that has successfully managed change.
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Glaxo views change as an ongoing process rather than a series of programmes. This generally means that change timescales are thought of in years rather than months (‘time’ context positive).
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It also allows an emphasis on ongoing realignment rather than transformation (‘scope’ context positive).
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Permanent organisational development units exist at national, regional and global levels. The input of these into executive teams ensures that cash and time resources are made available (‘capacity’ context positive) and that directors have a high readiness for change. (Note: Some writers have commented that Glaxo’s sales force were not as open to change during the Glaxo Welcome merger in the 1990s when the ‘readiness’ context was classified as negative overall).
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Test your understanding 3
BHH Clothing The European clothing industry is a mature industry characterised by the following:
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Powerful retailers resulting in high pressure on manufacturers’ margins
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Increasing globalisation resulting in many manufacturers switching production to cheaper locations outside Europe to reduce their cost base
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Increasing competition from Chinese manufacturers due to their lower costs, an improving reputation for quality and the relaxation of quotas.
Retailers buy on three criteria and put pressure on manufacturers to improve each of the following:
• • •
Design / quality Cost / price Speed to market / lead times
BHH is a clothing manufacturer based in Europe, making ladies and girls’ clothing aimed at the medium/high price segments of the market. The majority are sold under retailers' own labels. BHH's competitive strategy to date has been to differentiate through close collaboration with clients, good designs and hand finishing of garments. Historically BHH has resisted the pressure to source garments from cheaper countries outside of Europe but falling margins have lead directors to question this stance. Issues were brought to a head recently when BHH lost Forum, a major customer, despite offering a 4% price cut. Forum claimed that they could get similar garments supplied much cheaper by companies that use Chinese factories to make them. Two other large customers are also putting pressure on BHH to cut prices without compromising quality. At a recent board meeting directors decided that the only way forward was to keep design and finishing in Europe but outsource the manufacture of the basic garment to China. Unfortunately news of this decision leaked out to the workforce before the board could make a formal announcement, causing widespread unrest amoungst employees, some of whom have worked for BHH for over twenty years. There is thus now the threat of strike action to try to resist feared redundancies.
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chapter 15 Required Apply the change kaleidoscope model to BHH as follows: a) Examine the wider strategic context for change by assessing the main environmental influences and considering the alternative strategies avaliable to BHH. b) Analyse, information permitting, the contextual features that the directors must consider. c) Discuss the design choices available to manage the change process and make recommendations.
4 Leadership Transactional and transformational leadership Effective leadership is crucial for any organisation. But as we all know, there are different types of leaders using different types of power.
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Transactional leadership – the emphasis is on the clarification of goals and objectives, tasks and outcomes and rewards and punishment. Predominantly, transactional leaders rely on organisational power – they are interested in control, in outputs and in performance.
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Transformational leadership – leaders do more than set up simple exchanges or agreements. The leaders who really touch others’ lives and transform them totally are charismatic and inspiring, and they create excitement at work.
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The differences between transactional and transformational leadership are shown below: Transactional leadership Transformational leadership
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Clarify goals and objectives and the focus is on short term
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Focus on control mechanisms
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Solving problems
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Establish longterm vision
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Change the current situation. Every threat is seen as an opportunity
Maintain status quo or • improve current • situation
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Plan, organise and control
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Guard and defend existing culture
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Positional power exercised
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Create a climate of trust Make people solve their own problems by empowerment
Train, coach, counsel and mentor people Change culture Power comes from relationships and influencing people. The pressure exerted is subtle and has greater finesse.
Leadership styles Kotter and Schlesinger set out the following change approaches to deal with resistance:
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Participation – aims to involve employees, usually by allowing some input into decision making. This could easily result in employees enjoying raised levels of autonomy, by allowing them to design their own jobs, pay structures, etc.
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Education and communication – used as a background factor to reinforce another approach. This strategy relies upon the hopeful belief that communication about the benefits of change to employees will result in their acceptance of the need to exercise the changes necessary.
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Power/coercion – involves the compulsory approach by management to implement change. This method finds its roots from the formal authority that management possesses, together with legislative support.
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Facilitation and support – employees may need to be counselled to help them overcome their fears and anxieties about change. Management may find it necessary to develop individual awareness of the need for change.
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Manipulation and cooptation – involves covert attempts to sidestep potential resistance. The information that is disseminated is selective and distorted to only emphasise the benefits of the change. Cooptation involves giving key people access to the decisionmaking process.
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Negotiation – is often practised in unionised companies. Simply, the process of negotiation is exercised, enabling several parties with opposing interests to bargain. This bargaining leads to a situation of compromise and agreement.
Illustration 7 – Leadership Many people assume that negotiation is always the best approach to resolving conflict.The advantage of a negotiation strategy is that it offers the company the opportunity to note possible conflict and allows it to be dealt with in an orderly fashion. This hopefully prevents such problems as industrial action. Also, when an agreement has been made, the outcome can be to encourage commitment, preserve morale and maintain output. The main disadvantage is that this approach may be time consuming and, should opposition be strong enough, the management may accept a strategy where the benefits are considerably reduced.
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Test your understanding 4
Where strategic change is sought, it is also suggested that different styles might be more effective in some circumstances, for example: (a) What type of strategic change situation is best suited to participation, education and communication (b) What are likely to be best suited to coercion and power?
Test your understanding 5
Management can fire, transfer or demote individuals. They can also stifle their promotion or career prospects. (a) When would a manager use this approach with more success? (b) What are the advantages and disadvantages of such a style?
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Test your understanding 6
A manager is in charge of a team that has been given the task of introducing a new management reporting system into regional offices. There is considerable resistance to the changes from the office managers, and comments that you have heard include the following.
• • • • • •
I have more important work priorities to take up my time. I’m used to the old system. The new system is too complicated. The new system will create more paperwork. The new system will make me more accountable. My job in the new system is not clear.
How would you try to deal with this resistance to change?
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5 Change management Strategic leadership Strategic leaders are individuals upon whom strategy development and change are seen to be dependent.
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They are individuals personally identified with and central to the strategy of their organisation.
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Their personality or reputation may result in others willingly deferring to them and seeing strategy development as their province.
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In some organisations an individual may be central because he or she was its owner or founder; often the case in small businesses.
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It could be that an individual chief executive has turned round a business in times of difficulty and, as such, personifies the success of the organisation’s strategy.
Strategic leadership means having the ability to anticipate, prepare and get positioned for the future. A leader must be ‘tuned in’ to the signals that provide insight about the needs and wants of team members, senior management and suppliers. Such leaders must have:
Test your understanding 7
All change is a threat since it involves moving into the unknown. How can managers introduce change and minimise staff’s anxieties?
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Middle managers Middle managers – are the linking pin between the senior management team and the rest of the organisation. They have responsibility for helping their staff through the change process while simultaneously undertaking change themselves. They have four roles to perform. They need to:
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undertake personal change
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implement the necessary changes in their parts of the business – encourage individuals to use their initiative and put emphasis on teamwork
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keep the business going in the interim.
help their teams through change – build up and maintain the momentum of change until the change is completed and act as facilitator
Role of the change agent Whether internal or external, the change agent is central to the process, and is useful in helping the organisation to:
• • • •
define the problem and its cause diagnose solutions and select appropriate courses of action implement change transmit the learning process to others and the organisation overall.
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6 Models of the change process The change process – Lewin The process of change, shown in the diagram below, includes unfreezing habits or standard operating procedures, changing to new patterns and refreezing to ensure lasting effects.
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The process of changing the level of quality of customer service comprises three stages.
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Unfreezing – create the initial motivation to change by convincing staff of the undesirability of the present situation.
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The change process itself – mainly concerned with identifying what the new behaviour or norm should be. This stage will often involve new information being communicated and new attitudes, culture and concepts being adopted.
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Refreezing or stabilising the change – implying reinforcement of the new pattern of work or behaviour by rewards (praise, etc).
Force field analysis Lewin also emphasised the importance of force field analysis. He argued that managers should consider any change situation in terms of:
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the factors encouraging and facilitating the change (the driving forces) the factors that hinder change (the restraining forces).
If we want to bring about change we must disturb the equilibrium by:
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strengthening the driving forces weakening the restraining forces or both.
The model encourages us to identify the various forces impinging on the target of change, to consider the relative strengths of these forces and to explore alternative strategies for modifying the force field.
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Changeadept organisations – Kanter Attributes of companies that manage change successfully.
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The imagination to innovate. The professionalism to perform. The openness to collaborate.
Skills for leaders in changeadept organisations – skills identified by Kanter.
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Illustration 8 – Models of the change process Jack Black – motivational speaker Grants – the whisky producers – introduced a bigbang change starting with a physical move and then a change in organisational structure. The workforce was less than enthusiastic and management brought in Jack Black and made it compulsory for the staff to attend his MindStore course. Jack’s motivating presentation style moved his audience to make massive changes in their way of thinking, while inspiring and entertaining them. His contribution to innovating change within Grants and other organisations throughout the UK and Europe has created a reputation that is second to none. Jack has taught the MindStore programme to people as diverse as world champion athletes, premier football clubs, company directors, musicians, engineers, members of the general public and a wide range of organisations and blue chip companies.
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Test your understanding answers
Test your understanding 1
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Adaptation is change that can be accommodated within the current paradigm (the current organisational beliefs and assumptions) and occurs incrementally. This is the most common form of change in organisations.
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Reconstruction is the type of change that may be rapid and can involve a good deal of upheaval in an organisation, but which does not fundamentally change the paradigm.
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Evolution is a change in strategy that requires paradigm change, but over time.
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Revolution is change that requires rapid and major strategic and paradigm change, perhaps in circumstances where pressure for change is extreme, e.g. if profit decline or a takeover threatens the continued existence of the firm.
Test your understanding 2
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Stories – in many older statecontrolled health providers stories and myths cover the following: cures, villains (politicians), heroes and heroism, change agents are fools, abuse of managers and the golden age.
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Symbols – include terminology, white coats/uniforms, retinues, bleepers, doctors’ dining rooms and big institutions.
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Routines and rituals include clinical rituals, consultation ceremonies, blaming the next tier and treating patients like children – waiting rooms, putting to bed, waking up and ward rounds.
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Structure – is seen as hierarchical, mechanistic, tribal/functional and with a pecking order of services.
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Political systems – include professional bodies, the ‘old boy’ network and politicians.
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Control – is through waiting lists, financial reporting and responsibility.
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The paradigm – covers issues such as: – public service – it is ‘ours’ and a ‘good thing’ –
it is free at the point of delivery
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providers know best
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it has superior acute sector
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clinicians’ values.
Test your understanding 3 a) The strategic context The key environmental issues are as follows:
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High customer power The threat from low cost competitors
Both of these threats are likely to increase rather than decrease. The options available to BHH include the following: (1) The main advantages of the current plan are that they should reduce cost without compromising quality. Furthermore BHH keeps the higherskilled valueadded finishing aspects inhouse. This should help BHH manage the threat from lowcost competitors but does not address the problem of high customer power. (2) Keep manufacturing in Europe but focus on improving production efficiency to reduce costs. This could involve implementing TQM, better use of IT, improved throughput, eliminating processes that do not add value and improvign employee motivation and output. This could be planned as part of a BPR project but is likely to be just a short term fix. In the longer term the threat from lowercost Chinese manufacturers will still need to be addressed. (3) BHH could shift both manufacturing and finishing overseas, focussing mainly on the customer realtionship and design aspects. This should reduce costs further but would lose the differentiating factor that comes from high quality finishing. (4) BHH could seek to sell goods under its own brand name to reduce customer power. However, this will require substantial investment to develop the BHH brand in the market. (5) BHH could seek to vertically integrate forwards and open its own retail outlets. Again, the problem for BHH would be the major investment required.
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chapter 15 (6) BHH could manufacture higher volume garments overseas but seek to make and deliver small batches of more exclusive lines with shorter lead times. This would allow BHH to be more responsive to market trends, thus reducing the risk of "fashion miss" (i.e producing items that consumers do not want). The offer of reduced lead times may be difficult for Chinese firms to match and so would enhance BHH's strategy of differentiation. This would also reduce the scale of redundancies facing BHH. Summary Given its lack of brand strength, BHH has to move at least some of its manufacturing overseas to respond to the serious environmental threats it faces. Major change is thus unavoidable. However, the directors may wish to consider option 6 above as a way of reducing the impact of the change process. b) Contextual features The key contextual features are as follows:
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Time Given the recent loss of Forum and the threat from other retailers, BHH has to act quickly to develop a response. The time context is close to being a crisis rather than allowing an incremental approach. Time must thus be viewed as a strong driver of change but as a negative aspect in terms of how easy that change will be.
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Scope A significant proportion of manufacturing must be outsourced but design and finishing should continue as before without major changes. On balance the scope aspect is best described as realignment rather than transformational.
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Preservation It is vital that design, customer service and finishing skills are retained, despite other production staff (presumably) being made redundant. A major threat is that current employee unrest will result in key staff looking for new jobs elsewhere. The existing culture may need to be refocussed firmly on high quality and customer responsiveness.
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Diversity While there is likely to be a difference in subculture between production and design, only the latter will really be impacted by the change. Furthermore, there is likley to be a strong sense of unity within BHH due to them all being based in the same location and the length of time many employees ahve worked togather.Given that the change will primarily impact production workers, diversity is unlikley to be a problem. (Note: were BHH to switch to short leadtime, smallbatch production, then the change would be more widespread, in which case diversity would be a more major consideration).
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Capability Given that management have so far resisted the industry trend to outsource production, it is likeley that BHH does not have staff who are experienced in change and change management.
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Capacity Given falling margins it is probable that BHH does not have significant funds to invest in the change process. However, the move to outsourcing will not require significant funds. Instead there will be pressure on management time to locate and screen potential suppliers. There is insufficient information available to determine whether or not this will be a problem.
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Readiness A major problem facing management is that staff have discovered some aspects of the change without being properly informed. The negative implications have thus been blown out of proportion, resulting in threatened strike action. Staff are thus likely to oppose any changes rather than support them.
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Power there is insufficient information to determine how much authority and respect change agents have to implement proposed changes. It is clear however, that employee representatives are key players in the change process.
c) Design choices Key recommendations are as follows:
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Change path The most pressing problem is to avoid strike action and to reassure staff about the actual changes proposed. Only then can management look to address the details of how, when and where production should be outsourced.
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Change start point the crisis nature of the problem necessitates a topdown approach initially where senior management need to regain control of event.
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Change style once the immediate problem of staff unrest is addressed, management should adopt a particpative approach to involve employee representatives in deciding how and where redundancies should be made, whether some staff could be retrained and what support will be offfered to staff who lose their jobs.
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Change interventions Initially the key mechanism is likely to be communication and education to convince employees that only production staff involved in making the basic garments might lose jobs. As stated above particpation will be key to successful change management.
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Change roles Given the lack of experience of change, BHH may wish to employ the services of external consultants. Either way it is viatl that change action teams are set up, including deisgners, finishers and production staff. BHH could also consider including representatives from key customers to improve BHH's chances of keeping their accounts. Certainly consultants should be used to investigate potential chinese suppliers.
Test your understanding 4 (a) The type of strategic change situation that is best suited to participation, education and communication is where there are incremental modes of change or situations of transformational change in which time horizons are long. (b) What are likely to be best suited to coercion and power? Coercion and power are likely to be effective only if there is a crisis or need for rapid transformational change, unless change is taking place in an established autocratic culture.
Test your understanding 5 When there is a state of high unemployment, management enjoys greater power and is therefore able to use this strategy with more success. The advantages of this method are that changes can be made with speed and adhering to management’s requirements is easy when opposition from the workforce is weak. The disadvantages include the lack of commitment of the workforce and determination to reverse policy when times change and also poor support resulting in weak motivation, low morale and performance. Future implications also need to be considered. For example, when employees enjoy a stronger position, i.e. union representation, they are less likely to cooperate due to their experiences of past management treatment.
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Test your understanding 6 Change introduced through the use of power or manipulation is likely to add to anxiety. Education and communication will rarely succeed on their own when introducing major change. However, they are useful as a support for a negotiation or participation approach. The negotiation approach requires the existence of organised representatives and a formal procedure that is suitable for some items such as change in employment terms but would be inadvisable for other items of changing procedures, organisational changes, decentralisation, etc. In these cases, participation offers the best opportunity of allaying staff anxieties by involving them early in the change process and continuing that involvement through to completion.
Test your understanding 7 There is no single solution to this problem, but the key to implementing the new system successfully must be to win over the office managers and persuade them of the benefits of the new system. This is unlikely unless the managers are invited to contribute ideas and suggestions themselves. In other words, it is important to get them involved. In addition, it seems clear that the benefits of the new system and the details of the new system have not been fully explained. There is a ‘selling’ job to be done. It might be appropriate to meet the office managers individually to discuss the new system. Alternatively, it might be more constructive to invite all the regional office managers to a conference on the subject. Additional measures might be to:
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offer training in the new system to managers who need it
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discuss the benefits of the new system for the individual managers personally, as well as for the organisation. A bonus arrangement for successful implementation of the new system might be considered.
try to convince the managers that the new system has the support of senior management, and is a major priority
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Questions & Answers
1 The nature of strategic business analysis
Strategic planning
Question 1 McNamee states that ‘strategic management ……… is considered to be that type of management through which an organisation tries to obtain a good fit with its environment’. Management Accounting – Strategic Planning and Marketing, McNamee This approach has been characterised as ‘proactive’. There are many successful organisations that do not undertake strategic planning. This approach has been characterised as ‘reactive’ or sometimes ‘freewheeling opportunism’. Required (a) Explain the activities included in the process of preparing a strategic plan. (6 marks) (b) Explain the essential characteristics of the two approaches (strategic planning and freewheeling opportunism) mentioned above. What are the advantages and disadvantages of the two approaches? (13 marks) (c) Explain in what circumstances you would recommend an organisation to adopt: (i) strategic planning, (ii) freewheeling opportunism. (6 marks) (Total: 25 marks)
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2 The environment and competitive forces
Dunvegan Ltd
Question 1 Dunvegan Ltd is a forestry company operating in the UK, mainly in Scotland. In addition to forests at various stages of maturity, the company also owns many hectares of undeveloped land. So far Dunvegan Ltd’s timber has consisted almost exclusively of spruce trees which produce softwood used extensively in building work. Spruce sells for the equivalent of about £200 per cubic metre. However, genetic engineering has produced a remarkable new tree which has the growth characteristics of spruce, but which produces hard wood with the appearance and qualities of mahogany. This species, the Maho spruce, should grow quite happily in Scotland and produce worthwhile crops after ten years, each Maho spruce tree producing about 2 cubic metres. Currently, mahogany sells for the equivalent of £900 per cubic metre. The company which developed the Maho spruce has ensured that the trees are sterile and has also successfully applied for worldwide patents on the genetic material. Seedlings are available only from that company at a cost of £200 each. Dunvegan Ltd is considering whether to invest in Maho spruce. Land already owned by the company would be used (market value £1,000/hectare) and the company’s planting and drainage equipment would be assigned temporarily to the project. Because the seedlings are so expensive, relatively light planting would be used at 1,500 seedlings per hectare. Annual maintenance and security would £1,000/hectare for each of the ten years of the project. Dunvegan Ltd is considering planting 1,000 hectares with Maho spruce. In the UK Dunvegan Ltd has three main competitors; mahogany is also imported from four countries in the tropics where it is a valuable export. Some of the wood is from managed plantations, but some is from natural forest. Recently the price of mahogany has been rising as supplies become short and plantations have to be renewed. Dunvegan Ltd’s accountant has read an article in a recent edition of Lumber About, the monthly trade paper of the timber business, in which the economic effects of the Maho spruce were discussed. If around 3,0004,000 hectares were planted in the UK, then the price of mahogany would be £500 per cubic metre at the end of ten years. If around 2,000 hectares only were planted, then the price would be £800 per cubic metre. The breakeven price is estimated to be £639/cubic metre.
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Requirement From the viewpoint of an independent consultant, write a report to the directors of Dunvegan Ltd on the proposed Maho spruce plantation. Your report should include environmental and industry analysis. (25 marks)
CSC Clothing
Question 2 The Clothing Supply Company (CSC) is seen as a market leader in the design and manufacture of garments such as knitwear and weatherproof clothing for outdoor sports. The company is over a hundred years old and is based in rural islands of Scotland where it originally used to make and supply hill farmers with outdoor working clothes. CSC prides itself on the use of traditional fabric designs, the craftsmanship of its garment workers and the fact that it buys much of its cloth from local weavers, so supporting the local economy. In recent years CSC has achieved a degree of dominance over other specialist Scottish clothing manufacturers. The CSC product range now enjoys an international reputation based not only on design and the quality of handmade tailoring but also on the attractive and well known brand name, which is perceived to be associated with the country lifestyle of wealthy society leaders. CSC garments are distributed to and sold at premium prices through the best department stores in London, New York and Tokyo and are especially popular with overseas tourists visiting the United Kingdom. CSC had been a familyowned business until 1997 when it was sold to the KZ Corporation, a Pacific Rimbased multinational conglomerate involved in shipbuilding, construction and consumer electronics. The KZ Corporation is keen to maximise what it sees as the global brand potential of CSC and to justify what some KZ managers see as the excessively high price paid to the owner’s family for their controlling shares in CSC. To address these issues, the vicepresident of global operations at KZ has commissioned a strategy study to identify ways in which CSC can be integrated into the KZ Corporation.
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Required: (a) Using an appropriate framework for analysing national competitive advantage, examine the extent to which international location might determine the competitive position of the Clothing Supply Company. (16 marks) (b) The strategy study was concerned at the relatively high production cost of CSC clothing products and believed that costs could be substantially reduced by moving production to South East Asia. Evaluate the risks and opportunities presented by this suggestion. (9 marks) (Total: 25 marks)
3 Marketing and the value of goods and services
A University
Question 1 A University which derives most of its funds from the government provides undergraduate courses (leading to bachelors’ degrees) and postgraduate courses (leading to masters’ degrees). Some of its funds come from contributions from student fees, consultancy work and research. In recent years, the University has placed emphasis on recruiting lecturers who have achieved success in delivering good academic research. This has led to the University improving its reputation within its national academic community, and applications from prospective students for its courses have increased. The University has good student support facilities in respect of a library, which is wellstocked with books and journals and uptodate IT equipment. It also has a gymnasium and comprehensive sports facilities. Courses at the University are administered by wellqualified and trained nonteaching staff that provide nonacademic (that is, not learning related) support to the lecturers and students.
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Questions & Answers The University has had no difficulty in filling its courses to the level permitted by the government, but has experienced an increase in the numbers of students who have withdrawn from the first year of their courses after only a few months. An increasing number of students are also transferring from their threeyear undergraduate courses to other courses within the University but many have left and gone to different universities. This increasing trend of student withdrawal is having a detrimental effect on the University’s income as the government pays only for students who complete a full year of their study. You are the University’s management accountant and have been asked by the vicechancellor (who is the chief executive of the University) to review the withdrawal rate of students from the University’s courses. (Candidates do not require any knowledge of University admission and withdrawal processes to answer this question.) Required: Apply Value Chain Analysis to the University’s activities, and advise the vicechancellor how this analysis will help to determine why the rate of student withdrawal is increasing. (25 marks)
4 Internal resources, capabilities and competences
SWOT
Question 1 Many private and public sector organisations undertake a corporate appraisal of themselves by producing an analysis of their strengths, weaknesses, opportunities and threats (SWOT). Required: Evaluate the usefulness of SWOT analysis as a tool for carrying out organisation position appraisals. (25 marks)
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Qualispecs
Question 2 Qualispecs has a reputation for quality, traditional products. It has a group of optician shops, both rented and owned, from which it sells its spectacles. Recently, it has suffered intense competition and eroding customer loyalty, but a new chief executive has joined from one of its major rivals Fastglass. Fastglass is capturing Qualispecs’ market through partnership with a high street shopping group. These shops install minilabs in which prescriptions for spectacles are dispensed within an hour. Some competitors have successfully experimented with designer frames and sunglasses. Others have reduced costs through new computeraided production methods. Qualispecs has continued to operate as it always has, letting the product ‘speak for itself’ and failing to utilise advances in technology. Although production costs remain high, Qualispecs is financially secure and has large cash reserves. Fortunately, the country’s most popular sports star recently received a prestigious international award wearing a pair of Qualispecs’ spectacles. The new chief executive has established as a priority the need for improved financial performance. Following a review she discovers that: (i) targets are set centrally and shops report monthly. Site profitability varies enormously, and fixed costs are high in shopping malls (ii) shops exercise no control over job roles, working conditions, and pay rates (iii) individual staff pay is increased annually according to a pre determined pay scale. Everyone also receives a small oneoff payment based on group financial performance. Market analysts predict a slowdown in the national economy but feel that consumer spending will continue to increase, particularly among 18 to 30 year olds. Required: (a) Produce a corporate appraisal of Qualispecs, taking account of internal and external factors, and discuss the key strategic challenges facing the company. (20 marks)
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Questions & Answers (b) Corporate appraisal offers a ‘snapshot’ of the present. In order to focus on the future there is a need to develop realistic policies and programmes. Recommend, with reasons, strategies from your appraisal that would enable Qualispecs to build on its past success. (5 marks) (Total: 25 marks)
5 Stakeholders, ethics and culture
Social responsibilities
Question 1 An increasing number of companies have expressed their willingness to consider their wider social responsibilities. This often involves them in voluntarily undertaking extra responsibilities and costs, for example:
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in order to reduce pollution, they may decide to treat waste products to a higher standard than required by legislation.
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they may decline to trade with countries whose governments they find objectionable.
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they may pay wages above minimum levels.
(a) Discuss: (i) whether the pursuit of a policy of social responsibility necessarily involves a conflict with the objective of shareholder wealth maximisation; (ii) the extent to which the existence of a conflict between a company’s objectives is acceptable. (8 marks) (b) Discuss the extent to which it is feasible for a company to ‘operationalise’ its social responsibility aspirations, that is, whether it is possible to bring these considerations to strategic decision making in a programmed or systematic way. (10 marks)
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chapter 16 (c) Discuss whether it is feasible for companies to include the requirements of their stakeholders when they seek to recognise their wider social responsibilities. (7 marks) (Total: 25 marks)
Digwell Explorations
Question 2 Eastborough is a large region with a rugged, beautiful coastline where rare birds have recently settled on undisturbed cliffs. Since mining ceased 150 years ago, its main industries have been agriculture and fishing. However, today, many communities in Eastborough suffer high unemployment. Government initiatives for regeneration through tourism have met with little success as the area has poor road networks, unsightly derelict buildings and dirty beaches. Digwell Explorations, a listed company, has a reputation for maximising shareholder returns and has discovered substantial tin reserves in Eastborough. With new technology, mining could be profitable, provide jobs and boost the economy. A number of interest and pressure groups have, however, been vocal in opposing the scheme. Digwell Explorations, after much lobbying, has just received government permission to undertake mining. It could face difficulties in proceeding because of the likely activity of a group called the Eastborough Protection Alliance. This group includes wildlife protection representatives, villagers worried about the potential increase in traffic congestion and noise, environmentalists, and anticapitalism groups. Required: (a) Discuss the ethical issues that should have been considered by the government when granting permission for mining to go ahead. Explain the conflicts between the main stakeholder groups. (12 marks)
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Questions & Answers (b) By use of some (mapping) framework, analyse how the interest and power of pressure and stakeholder groups can be understood. Based on this analysis, identify how Digwell Explorations might respond to these groups. (13 marks) (Total: 25 marks)
6 Strategic choice I There are no questions for this chapter.
7 Strategic choice II
KNK Colour
Question 1 Kevin Anderson is the Managing Director of a printing company KNK Colour. He has recently attended a management training course where it was suggested that the logical start point for the strategic planning process would be to review the current situation of the organisation in terms of its internal resources and the external environment. Kevin has approached a management consultant to explain more about the strategic planning process. Acting in the capacity of the management consultant: You are required to: (a) Explain what you regard as a logical start point for the strategic planning process. (5 marks) (b) Describe how Porter’s Generic Strategies and Ansoff’s Matrix can be used by Kevin when wishing to generate strategies. (12 marks) (c) Explain the limitations of the two models which you have described in your answer to (b). (8 marks) (Total: 25 marks) 394
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C Engineering
Question 2 Introduction C is a large civil engineering company which carries out various building contracts within both its home and overseas markets. Its main area of work, particularly overseas, is in road construction. The company has a strong financial track record and successfully survived a major recession within its home market about ten years ago. Economic circumstances in overseas markets During the last three years, the overseas markets in which C has been carrying out building contracts have suffered a serious economic recession. Business confidence in these markets has been seriously weakened over this period. One country, which has been affected by adverse economic circumstances, is Eastlandia. C has been engaged in carrying out contract work in Eastlandia for several years. Government action in Eastlandia to protect its ailing economy has also had an adverse impact on foreign contractors such as C operating in this country. The concern felt by C’s directors regarding the economic situation in Eastlandia has been increased as a result of recent events involving a large development company (D) which C has worked with in the past. Company D, which is wholly owned by Eastlandian shareholders, had previously received Eastlandian government backing. However, it has recently been allowed to go into receivership without any further government support. The government announced that partial repayment of debts owed by the development company to local investors would take priority over those it owed to foreign investors.The result of this is that foreign investors are unlikely to see any recovery of their loans. The serious economic situation developing in Eastlandia has threatened to result in an economic recession. There has been a consequent negative effect on related industries within the country, such as steel, building materials and transport. Another major concern for C’s directors is the constant threat posed by currency fluctuations and the possibility of the Eastlandian government being forced into currency devaluation.
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Workinprogress Currently, C is engaged in the construction of a major road linking two parts of a new Eastlandian city, bypassing the central congested area. C is engaged as a subcontractor to a major Eastlandian development company – a different company from D which went into receivership recently. The contract was accepted by C after estimating that it would provide a high positive net present value. At the time the investment appraisal calculation was made, the expected currency exchange rate between Eastlands (Eastlandia’s currency) and £ sterling (C’s home currency) was 7.26 to the £ in the current year and 7.54 to the £ next year. In fact, the current exchange rate is 7.74 to the £ and the forward rate in 12 months’, time is quoted at 8.56 to the £. As far as C’s overall business is concerned, the contract represents about 10% of total turnover for the company. The contract commenced three months ago and payment to C is to be in Eastlands. Progress payments for the work done so far have been delayed without any explanation. The contract is about 15% complete and is expected to be finished in another 21 months’, which is three months later than planned. This will result in penalty payments being incurred by C. The directors of C have expressed to the contract manager for the road development in Eastlandia their concern regarding the need to undertake remedial work on what has been completed so far. This has resulted from the use of faulty materials obtained from an Eastlandian supplier. The remedial work has already consumed the total amount of the financial contingency which was allowed within the contract estimates. Strategic information and market size C uses external databases to establish the levels of its own share of the market and overall patterns of market growth and development. In addition, the management accounting department of the company provides internal information on market share and growth and internal capacity to meet its future contractual demands. Over the last two years, there has been a general decline in market opportunities, but C has in fact managed to increase its overall market share. This has been achieved because of its strong reputation for using good quality materials and applying high standards of workmanship.
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chapter 16 One of the major criticisms being made in Eastlandia is the poor quality of the civil engineering projects which have been completed quickly. There have been reports of numerous casualties among the site workers during the construction process. Some buildings have partially collapsed after completion and there have been instances where roads have begun to break up shortly after they have been opened. This has caused civilian casualties with some fatalities and resulted in noisy public protest in Eastlandia about the lack of attention to safety in civil engineering and building work. C is well regarded by the Eastlandian government. It has taken a long time for the directors of C to build the company’s reputation and gain recognition in Eastlandia for its workmanship. Possible future development The Eastlandian government has invited C’s directors to tender for other civil engineering work. C has taken the invitation and, if the company is successful in all its tenders, the total commitment in Eastlandia would represent about 40% of its order book. In recognition of the importance of the Eastlandian market and in order to reduce the potential losses from developers which engage their services becoming insolvent, the directors of C have proposed that a strategic alliance be formed. It is proposed that this alliance will be established with an Eastlandian civil engineering contractor who, it is expected, will have an insight into the financial integrity of potential customers. The alliance partner would be able to give clear advice as to which of these Eastlandian customers would be suitable for the establishment of contractual arrangements. Required: (a) Prepare a corporate appraisal for C in respect of its strengths, weaknesses and opportunities. (10 marks) (b) Discuss the threats posed to C by its involvement with the road building project in Eastlandia and explain how it can reduce the impact of these threats on its own strategic position. (25 marks)
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Questions & Answers (c) Discuss the strategic logic and practical considerations for C of entering into an alliance with an Eastlandian civil engineering contractor. (15 marks) (Total: 50 marks)
8 Organisational structure
Multinational company
Question 1 A multinational company which makes and sells consumer durables is reviewing the future organisational structure of its European operations, which employ over 100,000 people. Development of the company The company has expanded rapidly in the late 1940s and 1950s. Separate marketing companies were established in all the main European countries to serve the distinctive needs of the markets in each individual country, with some manufacturing facilities in the larger countries. Some exports to other smaller European markets had also been made. A divisional structure was adopted which permitted considerable freedom to individual country managers, who were responsible for all operations in their country. They could decide what models to design, make and sell, the marketing and pricing strategy, and the sourcing. The industry background There has been progressive integration of European economies, making crossborder transactions easier. The consumer durable industry has also become much more competitive and costconscious, and is faced with considerable overcapacity. New product models can no longer be justified for one country only, but are designed for sale in all countries, and made in one or two chosen plants (possibly in Eastern Europe, with cheaper labour) to serve all markets. The company now Although the countrybased divisional structure is still in place, most key decisions are now taken at European Head Office. These include the selection of new models to make and sell, and the plants at which these models are to be made, whether these are existing plants or new plants in cheap labour areas. 398
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Local markets are still distinctive with different taxation, distribution costs and pricing structures. Individual country managers still set country selling prices, although comparisons of prices across Europe reveal considerable anomalies. Manufacturing facilities are still operated in major countries, even though it is difficult to justify continuing investment without government subsidy. Required Discuss the potential problems of the present countrybased divisional structure and its effectiveness as Europe becomes more integrated and crossborder transactions become easier. Recommend, with reasons, whether the present divisional organisational structure should be retained, and if this is not supported, recommend an alternative. (25 marks)
9 Business process change
Nikki Photocopiers
Question 1 Nikki Photocopiers manufactures and sells photocopiers to businesses throughout Europe. The market is highly competitive with major global players present. Despite earlier success, the firm has recently seen a downturn in its performance as typified by the following customer ratings in European Business Photocopier Magazine: Rating
Value for money Features Reliability Servicing and maintenance
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Questions & Answers Last year the firm introduced a customer relationship management (CRM) software system so the fall in the service rating was a surprise. Before this survey had been published the directors had planned to redesign research and production processes but, based on this feedback, decided to look at the customer servicing and maintenance process first. Outsourcing was rejected as an option and the focus was placed on reengineering the process instead. Current process
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Proposed New Process
Required (a) Discuss whether service and maintenance should have been prioritised for reengineering. (7 marks) (b) Assess the likely impact of the proposed changes on Nikki Photocopiers’ competitive advantage. (6 marks)
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Questions & Answers (c) Outline the IT/IS implications of the proposal. (5 marks) (d) Outline the arguments for and against outsourcing maintenance. (7 marks) (25 marks)
Institute of Information Systems Administrators
Question 2 The Institute of Information System Administrators (IISA) holds examinations all over the world. Every six months 200,000 students in 450 centres in 75 different countries take one or more papers in the Institute’s sixpaper qualification. The examinations are conventional threehour examinations with the candidates writing answers in script answer books similar to those used by ACCA. The current system (described below) is both costly and timeconsuming and so the Institute has set up a project to look at the feasibility of online marking, where markers download images of the scripts and mark them on a Personal Computer. An outline of the proposed system is also described below. Current System At present the script answer books completed by the students are taken from the examination room by the invigilator and sent by secure courier to the IISA head office in London. From here, the scripts are sent by courier to examiners, who select and despatch scripts (again by secure courier) to markers. Once the scripts are marked they are returned to the IISA head office who arrange for them to be checked. This is an arithmetic check, making sure that the total for each question and script is correct. Once scripts have been checked, the marks for each question answered on the script are entered into a computer system. This system provides statistical analysis of the marks as well as printing certificates for successful candidates. A selection of the scripts is sent (again by courier) to the examiners for moderation, i.e. to check that markers have correctly applied the approved marking scheme. The examiners are also sent scripts where arithmetic errors have been found. All scripts are stored at the IISA head office. There are currently 6 examiners, 500 markers and 250 checkers.
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Proposed System The OnLine MArking Project (OLMAP) proposes that all script answer books are taken from the examination room by the invigilator and sent by secure courier to a documentimaging centre in Singapore. Here, the handwritten scripts will be scanned into a computer system. Examiners will be provided with online access (via the Internet) and they will be able to allocate a script to a particular marker. Once this allocation has taken place, the script is available for online marking. The marker is given access via the Internet and is able to download allocated scripts on the computer screen, where they may be marked using simple mouse movements. The software assists the marker by adding up the marks automatically, so no arithmetic script checking is required. At any time an examiner can download marked scripts to undertake moderation. This is made particularly effective by the system allowing the ‘hiding’ of marks given to the script by the original marker. Certificates will also be printed from this system. Project Issues The project manager for the project is Margaret Mendoza. She is impatient to progress the project and has identified a software package Emark, marketed by a multinational software company, which appears to fulfil the requirements. She believes that all examination subjects should use the package commencing with the examination session in 12 months’ time. She is committed to a direct changeover/conversion approach as ‘parallel running is just not a possibility in this situation’. However, the package is comparatively expensive, is untried in a world wide application, and has received some criticism from an IT examiner, Sue Yorke, who has attended a demonstration of the Emark software. The sponsor of the project is Mike Palmer. Mike is concerned about Margaret’s enthusiasm and impatience and wants a slower and more reflective approach to the project. He would like to see the software used in a pilot run, employing it on just one or two examinations at first. One of the reasons for this is his concern about the performance of the software, as he is worried that a slow response time will make the system unusable. Sue Yorke has suggested that it could be used on her IT paper, where markers are IT literate and enthusiastic to adopt the new marking software. In contrast to Margaret, Mike is in favour of a bespoke development (either inhouse or using an external software house) with the eventual goal of making the software commercially available to other examining bodies.
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Required: (a) Margaret Mendoza advocates the purchase of a software package, whilst Mike Palmer wishes to go for a bespoke application. Discuss whether a software package or a bespoke solution should be used. (12 marks) (b) Mike Palmer has already expressed concerns about potential performance problems with the software. Explain how the online marking application could be tested. (5 marks) (a) Discuss whether parallel running or direct changeover is more appropriate in this situation. (8 marks) (Total: 25 marks)
10 The role of information technology
SDW
Question 1 The SDW Company has been trading for one year. It provides rail travel services between three major cities in the country in which it operates. Mr M, the majority shareholder and managing director, is keen to expand its operations and, in particular, to use the internet as the major selling medium. He has discovered, for example, that doubling sales on the internet usually results in no additional costs. However, doubling sales using a call centre normally results in a doubling of staff and an increase in costs. All tickets are currently sold via the company’s call centre. The company has an internet site although this is used for publicity only, not for sales or marketing. Competitors currently use a mixture of selling media, although detailed information on the success of each medium is not available to the SDW Company. Mr M has asked you, as a qualified management accountant, to assist him in upgrading the company’s internet site and, in particular, showing how this will help to reduce operating costs. 404
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chapter 16 Required: (a) Advise Mr M on how to establish and implement an appropriate internet strategy for the SDW Company. (13 marks) (b) Discuss the key customerorientated features of an internet site, showing how these can be used to meet the objective of cost reduction required by Mr M. (12 marks) (Total: 25 marks)
11 Quality
RUS plc
Question 1 RUS plc operates a chain of hotels. Its strategy has been to provide mediumpriced accommodation for business people during the week and for families at weekends. The market has become increasingly competitive and RUS plc has decided to change its strategy. In future, it will provide ‘a highquality service for the discerning guest’. You are required: (a) to explain the relevance of a programme of ‘total quality management’ for RUS plc in the implementation of its new strategy (10 marks) (b) to summarise the financial and organisational implications of RUS plc’s new strategy (5 marks)
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Questions & Answers (c) to discuss the contribution that RUS plc’s management accountant could make to the new strategy. (10 marks) (Total: 25 marks)
12 Project management
Book retailer
Question 1 Williams and Sons is a longestablished and familyowned book retailer. It operates through six large bookshops located in six different city centres. The bookshops carry a very wide and comprehensive range of stock focused on both the academic and general interest markets. The bookshops’ turnover has been static over recent years and profit has fallen due to the entry of supermarkets and other suppliers, such as book clubs, into the book retailing business. The supermarkets typically carry a narrow range of books and are discounting these quite heavily. Williams and Sons has a centralised computer system which deals with accounting and stock control. There are no other significant applications. John Williams, the Managing Director, has recently arrived back from a book fair, enthusing over the potential of the internet and the concept of ecommerce. He has said that these developments in technology can totally change the direction and competitive potential of the business. Required: (a) Describe the strategic potential for information technology at Williams and Sons, using a suitable conceptual framework to support your answer. (13 marks) (b) Explain the key principles required in developing an information technology plan, including the new skills required. (12 marks) (Total: 25 marks) 406
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13 The role of finance in formulating and implementing business strategy
Multinational and local authority
Question 1 All organisations have objectives in some form or another. The methods of setting these objectives vary depending on the nature of the organisation. After they have been set and an appropriate period of time has elapsed, organisations should assess to what extent their objectives have been achieved. Two organisations with very different characteristics set strategic objectives and evaluate their achievement. The two organisations are:
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a publiclyfunded local administrative authority which provides housing, education, social and road maintenance services for an area within a country, and
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a multinational conglomerate company (MNC).
Required: (a) Explain the differences between how the local administrative authority and the MNC should set their strategic objectives. (10 marks) (b) Discuss how each organisation should assess how well it has performed in respect of the attainment of its strategic objectives. (15 marks) (Total: 25 marks)
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14 Strategy and people
Jays
Question 1 Jays is a former footwear manufacturer. The firm was started in Melbourne, Australia in 1900 by the grandfather of Jay, the present owner. Over the years, Jays grew into a national retail chain with hundreds of shops. In 1996, cheap imports forced the sale of the shoe retail business but Jay retained 123 outlets and developed a ‘whileyou wait’ shoe repair service in comfortable surroundings. The formula proved very successful and the business has grown to 325 outlets. By 1999, the market in shoe repairs was becoming saturated, so Jay added the highmargin businesses of keycutting and watch repair, using the same outlets as used for shoe repair and adding more as demand grew. Though watch repair has traditionally been the preserve of highstreet jewellers, Jay found that the skill barrier to this occupation was not as high as jewellers claimed it to be. In fact, he found that most watch repairs boil down to about ten simple operations and anything more complex could be dealt with by specialists at a national centre. In two years sales grew from zero to three million Australian dollars. Employees in each of these businesses are primarily craftsmen or semi skilled operators but, as a retailer, Jay recognises how critical excellent customer service is in this business. The outlets are typically staffed by a handful of craftsmen, though in busy centres the number rises to ten or more. Seating is provided for customers, with magazines and piped music to keep them occupied while waiting. Required: (a) Explain the human resource management implications of Jays’ shift from shoe retailer to that of a provider of services in shoe repair, keycutting and watch repairs. (15 marks) (b) Describe how Jays might go about motivating its workforce. (10 marks) (Total: 25 marks) 408
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15 Strategic development and managing strategic change
Y
Question 1 Y is one of the five main high street banks in the country. Since banking deregulation in the late 1980s, Y, like other banks, has been facing increasing competition, first from other existing financial institutions but more recently from new entrants who have started to offer deposit accounts and a number of other financial services. In seeking to respond to these competitive threats, the bank’s senior management has started to implement a number of changes. These involve a significant restructuring of the organisation with the removal of a number of layers of management, and a consequent reduction in staffing levels in most divisions. The closure of a number of high street branches is also planned. The telephonebanking arm is being substantially enlarged and a major investment in IT is being undertaken. The effect on staff will be considerable. A programme of voluntary redundancy and redeployment is planned and, given the demand for new skills, a considerable amount of training will need to be carried out. Despite clear evidence of the threat of the future of the bank, the plans set forth by management are meeting resistance from the workforce. The banking unions in particular seem determined to obstruct the changes wherever possible. Required(with reference to the above scenario) (a) Explain why the implementation of organisational change often proves to be so difficult. (12 marks) (b) Advise Y’s management about the ways in which change can be facilitated. (13 marks) (Total: 25 marks)
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Test your understanding answers
Strategic planning Answer 1 (a) Setting objectives The strategic planning process begins with setting the organisation’s longterm objectives. These set the targets which the organisation’s strategic plans will attempt to achieve. Objectives define where the organisation wants to be in ‘n’ years’ time. Environmental analysis This involves investigating, analysing and understanding the organisation’s external environment, using tools such as PEST analysis Internal and corporate appraisal These appraisals require a detailed analysis of the organisation’s current position. They cover the whole undertaking and identify its strengths, weaknesses, opportunities and threats. They answer the question, ‘where is the organisation now?’. Strategic choice Each option available to the organisation is identified at this stage. These are then evaluated and the optimal course of action decided upon. Implementation The strategic plans are then formulated, agreed and implemented to a time schedule, which should be longterm e.g. have a tenyear planning horizon. Control The strategic planning process is completed by continuously comparing actual performance with the plan and providing feedback on results. This feedback can be used to update plans and as a basis for learning through experience.
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chapter 16 (b) Strategic planning This is a formal planning process that has clearly defined objectives, which will have been agreed by its stakeholders. Strategic planning operates within a logical set of procedures, which give it an easily understood structure. Strategic planning is a longterm planning process with a time horizon of several years. It relates to the whole undertaking and recognises that an organisation is an open system continuously interacting with its external environment. Strategic planning advantages: –
It sets out a clear direction for the organisation to move towards. This provides a vision for the future.
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It makes managers look ahead, think ahead and be proactive.
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Future threats and opportunities can be identified and evaluated.
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It gives a perspective of future changes so the organisation can adapt to them gradually.
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It is a structured method of planning, which employees and managers can understand and put into practice.
Some disadvantages of strategic planning include: –
It acts as a constraint on management ability to act.
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Once set, achieving the plan becomes the goal. The real objectives are lost sight of.
Freewheeling opportunism This is the shortterm identification and exploitation of opportunities. It only looks at the present and immediate future and uses an ad hoc approach to management, reacting to situations as they develop.
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Freewheeling opportunism relies on the individual entrepreneurial skills of the organisation’s proprietors or managers. It is informal and has no set procedures that must be followed. Some of the advantages claimed by supporters of freewheeling opportunism are: –
It is flexible and can spontaneously adapt to a rapidly changing situation.
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It has none of the procedural constraints that formal strategic planning has.
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Decisions can be made rapidly and implemented, giving the organisation a competitive advantage.
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It supports and encourages an innovative culture in the organisation.
Some disadvantages of freewheeling opportunism are: –
There is no longterm vision for the future. Threats may not be seen in advance.
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In large undertakings, suboptimisation will occur when it is used.
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There are no clear objectives to work towards.
(c) The method of planning used in an organisation will depend on many factors, including: –
Its size and leadership style.
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The organisation culture and structure.
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The nature of its activities.
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The skills and aspirations of its managers.
Formal strategic planning should be used in larger organisations that are established and have a degree of centralised control. It is unlikely that organisations such as government institutions and public limited companies, would survive without strategic planning in today’s competitive world. Freewheeling opportunism might be justified in very small undertakings in which responsibility for management is vested in the proprietors who have considerable entrepreneurial skills, such as a business operating in a turbulent, creative market.
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Dunvegan Ltd Answer 1 Report To The Directors of Dunvegan Ltd From Independent Consultant Date Today Subject Proposed Maho spruce plantation Introduction I have been asked to give advice on the proposal to plant 1,000 hectares of land with Maho spruce. Political Mahogany currently comes from four countries in the tropics. As it is a valuable export, these countries can be expected to be willing to sell mahogany irrespective of local political changes. In the UK, however, there is growing concern about the deforestation of the tropics and suspicion about the source of many hardwoods. It is possible that the UK or EC will tighten import legislation. Locallygrown, renewable mahogany substitute should be favoured in this ecologicallyaware age. Economic Mahogany is principally used for building (window frames etc.) and furniture (veneers). Both of these industries are very sensitive to the health of the economy. It is difficult to predict the economic health of the country ten years hence and so the project will have considerable risk and uncertainty. Social If homeowning continues to grow, it is to be expected that demand for highquality materials will also grow. As mentioned under the political paragraph, using tropical hardwoods could become socially unacceptable and it would appear that the Maho spruce should provide a politically correct substitute. However, some people may object to using geneticallyengineered material.
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Questions & Answers Technological Although Maho spruce has been patented, there is no reason why other manufacturers could not develop similar products. That would drive down the cost of seedlings (a major cost of the undertaking) and hence the price that would eventually have to be achieved to make the investment pay. The industry competitive position The industry competitive position can be analysed in terms of rivals, buyers, suppliers, substitutes and potential new entrants to the market. Rivals The potential rivals are the other UK forestry companies and the suppliers from the tropics. Whether other UK forestry companies will decide to compete is a very complex decision and is discussed below. The foreign suppliers, which depend on their hardwood for valuable foreign currency, are likely to retaliate with price cuts when they perceive Maho spruce as a threat. Buyers It is likely that there are many relatively small buyers of hardwood. If so, there will be little pressure from them. Suppliers The main supplier to Dunvegan Ltd is the supplier of the seedlings. At the moment there is only one supplier and this would normally place that company in a very strong position. However, the supply pattern here is unusual. Once 1,000 hectares are planted, the supplier has no power at all over this project as no further supplies are needed for it. Future projects would need to be evaluated in the light of supplier attitudes at the time. New entrants New entrants into the forestry industry are unlikely, but there is some risk if the crops become more lucrative and land is set aside from normal agricultural use (EC regulations). Much will depend on the perceived economies of the industry.
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chapter 16 Substitutes Maho spruce is an excellent substitute for mahogany. Substitutes for Maho spruce might be other geneticallyengineered trees with more attractive or cheaper timber. Substitutes maturing more quickly would be particularly serious as they would capture the market and drive down prices before Dunvegan’s timber had matured. Financial forecasts If the present price of mahogany and mahogany substitutes is maintained, then the project will produce a positive net present value. If the price falls by more than about 30% to below £639, then the project will produce a negative net present value. Competitor reaction As mentioned above, it is likely that the foreign suppliers will cut their prices so as to keep earning foreign exchange. The reaction of UK forestry companies will depend on their estimates of future prices and supplies. If the price of mahogany is expected to fall to £500, then the plantation should not be undertaken as there would be a negative NPV. If the price is expected to fall to no less than £800 then the project would produce a positive NPV. However, Dunvegan Ltd’s competitors will have carried out similar calculations. Their breakeven points must be very similar to Dunvegan Ltd’s as the NPV calculation is dominated by the initial price of the seedlings and the final price of the timber. The competitors can also be assumed to have read the economist’s article in the trade journal. All the players are faced with an investment paradox. (a) If a player believes that the others will invest, then investing is not worthwhile as the timber price will fall to an uneconomic level. (Of course, if they all believe this, no one will invest and the price would stay high.) (b) If a player believes that the others will not invest, then investing is worthwhile as the price would stay high. (Of course, if they all believe this, all will invest and the price would fall.) Conventional financial analysis is of little further help here. It is crucial to try to find out the true intentions of the competition or to try to limit their scope for competition.
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Questions & Answers It is in the interests of the producers of the Maho spruce to bring stability to their market. If everyone is afraid to invest, then that company will get no revenue. An agreement with the supply company to limit the sale of seedlings each year would ensure that the prices remained higher and that investment would be worthwhile. Size of investment The proposed investment is large, especially as there are many important factors which could change over the project’s life: the project is high risk even if not using innovative technology. Risk could be reduced by planting over several years rather than 1,000 hectares at one time. That way the economics of the investment could be monitored and decisions taken about each slice of investment. Naturally, this approach would delay the maturity of some of the crop. There is a risk that this would reduce the final income (if mahogany prices were to fall) but prices could also rise (strong reaction against natural mahogany, economic upturn). Delaying planting could also reduce the initial price of seedlings as other bioengineering companies launch new products. Summary In so far as environmental factors can be judged, it would seem that Maho spruce should be a popular product. The main risk arises from technological advances which could produce similar cheaper timber. However, the economics of the project are very dependent on the future price of Maho spruce timber, its substitutes and the reactions of rivals.
CSC Clothing Answer 2 (a) The extent to which location has historically determined the competitive advantage of CSC and the extent to which it will do so in the future are issues of crucial importance to KZ. A historical analysis of location provides a deeper understanding of CSC’s strategic position, and an analysis of the extent to which it is still relevant will assist KZ as it contemplates shifting CSC production and exploiting the CSC brand image. The debate about location and comparative advantage is both long standing and ongoing. However, the work of Porter (Competitive Advantage of Nations) presents us with a useful framework in which to consider the attributes of advantage. Porter identifies four interlocking elements which form a ‘diamond’ of locationbased advantage. These four elements can be used to analyse the position of CSC as follows:
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Factor conditions. These are the resource inputs needed by the business and in particular the inherited factors of natural resources – climate, labour and the evolution of knowledge and skills. CSC grew out of a business which originally both made and supplied outdoor clothing to Scottish hill farmers thus reflecting the influence of a climate and a geography which demanded tough weatherproof clothing (influences – quality and fitness for purpose) and developed the knowledge and skills to design and manufacture such clothing.
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Intense home market demand conditions, led by sophisticated and numerous independent buyers, drive firms to innovate continually and improve their products. Over time, CSC has been required to meet the demanding product requirements of the Scottish hill farmers which means that its products have evolved features of superior weatherproofing and durability. Although the products may today be bought by people who will never venture on a mountain in winter, they are nevertheless buying into what is seen to be a product ownership image associated with the product’s history and design attributes (similar to buying an offroad, fourwheel drive vehicle for use within a city environment).
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Related and supporting local industries, which through mutual support and collaboration enhance competitive potential, for example through design synergies achieved by close co operation between firms operating within the value chain. CSC has enjoyed the support of local weavers which allows integration of cloth requirements such as supply and delivery, quality attributes and, in particular, the traditional pattern design used in the garment fabrics.
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Intense local demand rivalry which leads to the emergence of firms with strong competitive characteristics, in other words, the home market hones competitive skills which promote domination in worldwide markets. This appears to be the case within CSC’s home market where CSC first emerged as the market leader among a number of competing Scottish firms within this specialist garment business.
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Questions & Answers Porter also identifies other factors, such as the role of government, which might assist through intervention – industry support in research and development, or more often nonintervention – creating a business environment which promotes competition. CSC has evolved through a onehundredyear period of relative business stability and freedom from either intervention or subsidy. Finally, there is always an element of chance within business success stories. CSC has achieved its success through a process of product development (moving from simple garments for farmers to garmentbased products for sports such as shooting and fishing), and market development (using existing products in new markets – creating a fashion niche image). Both opportunities have in part been made possible by the chance adoption of its basic products by the rich and famous, which in turn has made the products prestigious and therefore ones which the notsorich and famous wish to acquire. (b) CSC could reduce its product costs by moving garment production from Scotland to South East Asia. However, it is doubtful to what extent this move has a strategic fit with the competitive strategy adopted by CSC. The CSC strategy is based on focused differentiation, that is, creating a perception of high value to the customer and charging a high price for it – by implication such a strategy will lead to niche market segmentation. In this case, the niche is a global one which targets similar customers with similar aspirations worldwide (other product examples, Rolex, Gucci) and is independent of cultural differences. This is the context within which KZ must decide its production policy for CSC. The decision cannot be costbased alone and subsequently made in isolation of the values, needs and requirements of the customers of CSC and their associated patterns of buyer behaviour. CSC products are not bought on the basis of price, but on the basis of buyers seeking to acquire reflected status associated with the product. The fact that each garment is handmade in Scotland, using traditional materials and design, is a key part of what the customer is buying into. CSC recognise this and its integrated marketing strategy reflects this – price, product concept, distribution channels (the best stores) and promotion are all in balance. Although it may be possible to maintain product quality by moving production away from Scotland KZ would run a major risk of destroying the CSC product concept and hence the differentiation element which allows the adoption of a premium pricing approach.
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A University Answer 1 Value activities consist of all those activities a firm undertakes, from the moment of initial purchase of raw materials and other inputs, to the moment of final receipt of payment from the customer. Value chain analysis (VCA) looks at each of the processes that make up the chain of activity and asks both how important it is in a given company’s production or service activity, and how the company compares in that respect to its competitors. The value chain model divides an organisation’s activities into nine generic activities, five primary activities and four support activities. To review the withdrawal rate of students from the University’s courses a clear statement of the University’s objectives and what they are trying to achieve needs to be drawn up by the management team. The management accountant will then analyse the primary and support activities in the University’s value chain and identify areas that are causing the greatest level of concern. Primary activities
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Inbound logistics – are the activities concerned with handling the inputs. From the University’s point of view the analysis will cover: – the intake of students, e.g. whether entry requirements have changed. A lowering of standards may lead to students being unable to cope with the work, while a raising may find students’ expectations of the course is not fulfilled. An increase in the intake could lead to more revenue but less individual attention for students with shortterm problems. –
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the courses offered and whether they have changed over the period of increased withdrawal.
Operations – concerned with the transformation of the inputs and will look in detail at: – how the University compares with competitor institutions – do they have similar withdrawal rates in the first year? If not, then the University needs to determine what they are doing differently and what they must do to improve the service. A review of the students that leave might show a pattern to the transfers, e.g. students leaving to go to particular universities. –
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the calibre of staff – are the lecturers able to communicate effectively and do they show an interest in helping the students in their studies? Also, does their treatment of students vary between the first year and subsequent years?
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Outbound logistics – are concerned with the finished product, i.e. the skills and abilities of the graduates after completing their courses and the perception of the customers – the government and employers.
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Marketing and sales – are responsible for communication with the customers, e.g. advertising and promotion. The analysis should assess what attracts the students and why an increasing number believe that the course is not living up to their expectations.
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Service – covers all of the activities that occur after graduation and includes arranging milk rounds, job fairs and other links to potential employers. The management accountant should analyse the types of contact with the graduate and the retention rates for students moving on to other courses in the University.
Support activities
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Procurement – is the process of purchasing inputs. Areas that will be analysed include the efficiency and adequacy of the supplies and the level of administrative support provided to the lecturers and students.
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Technology development – covers not just machines and processes, but also knowhow. Improved technology development may be employed in delivering course material to students. Technology may also be used in undertaking marketing research into the attractiveness of types of courses to prospective students.
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Human resource management transcends all primary activities. It includes all the activities involved in the recruitment, training, development and remuneration of staff.
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Infrastructure – which supports the entire value chain, includes the systems of planning, finance, quality control and estate management.
Managing the linkages
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Primaryprimary. Interdepartmental cooperation between, say, inbound logistics and marketing to ensure that prospective students are given sufficient information about courses.
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Supportprimary. Computerbased operations, involving co operation between information technology and lecturers. For example, teaching aids and course notes made available.
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Supportsupport. Computerbased information systems automatically monitoring recruitment policies.
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chapter 16 The VCA analysis will help to determine why the rate of student withdrawal is increasing and to decide how individual activities might be changed to improve the value of the University’s offerings. Because of the linkages it is important that the organisation’s activities are not dealt with in isolation. Choices will have to be made about the relationships and how they influence strategic capability e.g. the recruitment of staff with more teaching rather than research experience might have a positive effect on the students’ experience but a negative effect on the University’s reputation within its national academic community. Linkages between the University’s support and primary activities may also need strengthening, e.g. if some of the lecturers are lacking in communication skills it could be a direct result of management style or a failure of human resources policy. Any inadequacies in support will have a detrimental effect on lecturers, which may be a contributory factor leading to the problems of student withdrawal facing the University.
SWOT Answer 1 A corporate appraisal, also called a corporate review or a position appraisal, is defined as ‘a critical assessment of the strengths, weaknesses, opportunities and threats (SWOT analysis) in relation to the internal and environmental factors affecting an entity in order to establish its condition prior to the preparation of the longterm plan’. It is a technique or method used in a rational planning model of strategic planning. SWOT analysis considers factors both internal to the organisation and in the business environment. An internal assessment identifies and assesses the strengths and weaknesses of the organisation. Strengths are internal factors where the organisation has a distinct advantage, whereas weaknesses are internal factors where the organisation could be vulnerable. Internal factors could relate to resources and systems, such as the quality of skilled staff, IT systems, distribution systems, investment in technology, intellectual property, cash flow and so on. Opportunities and threats relate to the environment. Opportunities are factors in the environment that the organisation might be able to exploit and develop. Threats are challenges and risks in the environment that could affect the organisation adversely. Environmental factors include the emergence of new competitors or weaknesses in existing competitors, changes in the nature of customer demand and markets, changes in technology and so on.
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Questions & Answers A benefit of SWOT analysis is that it provides a simple and logical framework for assessing the organisation’s position, with a view to deciding what might be done to exploit strengthsand opportunities, and what might be necessary to eliminate weaknesses or counter threats. A summary of strengths, weaknesses, opportunities and threats can be presented in a simple cruciform chart. SWOT is no more than a planning technique, but it can be used with other rational planning model techniques, such as PEST analysis and Porter’s Five Forces Model, to assess the strategic position of the organisation, and reach decisions about what its strategies should be for the future. It is also consistent with critical success factor analysis: if an organisation has identified a number of CSFs, it can use SWOT analysis to assess the extent to which it is in a position to achieve its key performance targets in the future. Recognising weaknesses and threats also helps management to identify the actual or potential planning gap between the organisation’s current position and where it would like to be. SWOT analysis is also consistent with risk management: identifying weaknesses and environmental threats could be an element in the continuing task of senior management to monitor and control risks. There are some potential limitations to SWOT analysis.
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It is not necessarily clear who should carry out the analysis. It might be questioned whether any individual or small planning team has a sufficient knowledge of the organisation to carry out a thorough SWOT analysis by itself.
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An analysis might overlook some important factors altogether. In particular, an organisation’s planners might fail to spot an opportunity or a threat in the environment.
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There is no way of being certain that the analysis will be rigorous and accurate. Factors might be identified as strengths when in fact they might be weaknesses. Threats might be seen as opportunities. It is probable, in fact, that some factors could be partly a strength and partly a weakness, or partly a threat and partly an opportunity. If so, it is quite possible that the analysis will make incorrect judgements.
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It is possible to prioritise strengths, weaknesses, opportunities and threats and rank them in order of significance. However, any attempt to give priority rankings could well be unscientific and misleading. It is a method for developing concepts and ideas rather than for quantifying risks and benefits.
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It might also be argued that SWOT analysis focuses on the longer term rather than the immediate issues facing the organisation.
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chapter 16 In summary, SWOT analysis is a planning technique. It can be used to assess the position of the organisation as a preliminary step to developing strategies for the future. Like other techniques, it can be of great value to management, but it does not guarantee correct answers. It is only as good as the individuals who use it.
Qualispecs Answer 2 (a) Corporate appraisal A corporate appraisal is an overview of an organisation’s current position. It leads on from the internal and external analysis undertaken as part of the business planning process. As the company works towards achieving its objectives, the corporate appraisal is a summary of the company’s: –
strengths within the organisation relative to competitors
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weaknesses within the organisation relative to competitors
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opportunities available from the external environment
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threats from the external environment.
The company must develop a strategy which: –
capitalises on the strengths
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overcomes or mitigates the impact of weaknesses
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takes suitable opportunities
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overcomes or mitigates the threats.
In the case of Qualispecs: Strengths –
Reputation for quality
Quality is a major reason why people buy products, and continuing to build on this reputation will ensure customers continue to buy Qualispecs’s products.
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Questions & Answers –
Financially secure/large cash reserves
Qualispecs does not need to rush into the implementation of new strategies. It can take its time to ensure strategies chosen are appropriate for the business and implemented effectively. They also have funds to invest in new ventures without having to raise external funds. –
Backing of a famous sports star
This helps to improve the image of Qualispecs’s products which in turn should result in higher sales, particularly amongst the younger market that might be influenced by the sports star. –
New Chief Executive
The group has a new Chief Executive who has joined from a rival, Fastglass. Fastglass has been a successful and innovative company and the Chief Executive may be able to bring new ideas and provide a fresh approach. –
Established group with many stores
The group has a good basic infrastructure including many stores and experienced staff. This allows them to implement new strategies quickly and easily. Weaknesses –
Slower dispensing of spectacles
Customer service is worse than competitors in this respect and may be a reason for the reducing customer loyalty. –
Less trendy products than competitors
Some competitors have successfully sold designer frames. These are likely to be stylish and trendy compared to Qualispecs’ traditional products. Qualispecs may need to update products more often with the latest designs. –
Smaller product range than competitors
Some competitors have a wider product range than Qualispecs. This provides more choice which may attract customers and also gives competitors the opportunity to onsell products, i.e. selling prescription sunglasses at the same time as standard spectacles. 424
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chapter 16 –
Older production methods causing higher costs
This will either cause prices to be higher than competitors or margins to be less. In either case competitors have a distinct advantage. –
Varying performance around the group
Little action is being taken to improve performance of poorly performing stores causing varying performance around the group. This indicates a weakness in internal control systems and perhaps also in development and training programmes. –
Little autonomy for shops
Without autonomy there is little a shop manager can do to improve local operations. In London, for instance, pay may need to be higher to attract the right staff. With no local control over pay levels, shop managers may find it hard to employ good staff and hence improve their business. This lack of autonomy may also be demotivating to managers. Responsibility was one of the major factors outlined by Hertzberg in his motivation theory as a way to motivate staff. –
No incentive to improve for staff
The use of groupbased bonuses means that people cannot be rewarded for good individual performance. Therefore, individuals have little incentive to improve. Opportunities Note: Opportunities should be in relation to the market as a whole. They therefore need to be available to all competitors in the market. –
To adopt new technologies to reduce costs (see earlier)
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To stock a wide range of uptodate products (see earlier)
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Consumer spending will continue to increase
Despite a slowdown in the economy, consumer spending is likely to increase suggesting an increasing market size in the future. There is therefore further opportunity for all competitors to increase sales.
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Questions & Answers –
Targeting 18 to 30 year olds
The 18 to 30yearold age group offers a particular opportunity since its spending is likely to increase especially quickly. There is therefore an opportunity to understand this group’s needs and to target its specifically. –
Develop a partnership with a high street shopping group
Fastglass has already done this successfully and Qualispecs could follow suit. There are likely to be limited suitable partners so Qualispecs must act quickly before other firms make arrangements with the best partners. Threats –
Intense competition/eroding customer loyalty
Existing competitors are adopting new strategies with great success (e.g. Fastglass developed joint ventures). This has resulted in Qualispecs’s customers moving to competitors, thus reducing profits. This is likely to be a continued threat to Qualispecs who needs to respond. –
Downturn in the economy
In the longterm, if the downturn continues it will affect all industries and consumer spending will be likely to fall as people become more defensive in their spending habits. Key strategic challenges In summary, the key strategic challenges are to: –
Improve the current lack of clear generic strategy (‘stuck in the middle’)
Examining Michael Porter’s Generic Strategies, Qualispecs appears to have neither a cost leader differentiation nor a focus on any particular niche. While traditionally quality has been their focus, new innovations from competitors have eroded its position as the highest quality spectacle retailer. In the long run it will find it hard to compete effectively if it does not rectify this.
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chapter 16 Note: When asked to discuss current or future strategies Porter’s Generic Strategies is always a good model to use. It is common in the exam to present failing companies (like Qualispecs) and you usually find such companies are ‘stuck in the middle’ and need to clarify their generic strategy in order to compete. –
Be more innovative in product and market development
Competitors have successfully developed new strategies while Qualispecs has done very little. This has seen it lose business to competitors. To be successful in the future it needs to update their product range regularly and be more innovative in developing new strategies (e.g. joint ventures). –
Improve performance on a divisional basis by updating internal policies and procedures
Current policies and procedures are demotivating staff and causing varying divisional performance. (b) Strategies to move the business forward Note: detailed tools for generating strategic options are discussed in chapter 6. At this stage you were expected to use your common sense. Competitive strategy Given the key strength of Qualispecs as having a reputation for quality spectacles, and their current weakness in the cost of products produced, it would appear logical for Qualispecs to refocus activities on quality by producing very high quality spectacles (modern design, hardwearing, uptodate features) with a highquality service (fast dispensing, knowledgeable staff). Current product/current market Qualispecs would benefit from consolidating its current strengths and refocusing on quality. It should invest in new technology in order to reduce costs which will it to them be competitive. This also capitalises on its significant cash reserves. It needs to improve its internal processes to ensure that staff are motivated through a good incentive scheme, quality training and by being given autonomy. This will capitalise on its skilled workforce and overcome the weakness in the way it is managed.
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Questions & Answers
Current market/new products Product development is a vital new strategy for Qualispecs to follow. Its competitors have been successful in doing this. One aspect of providing a high quality service is being able to offer a wide range of products to meet varying customer needs. Qualispecs may need to invest more in Research and Development and implement new product development programmes. New market/current products A joint venture strategy with a retailer who competes based on quality (e.g. Marks and Spencer) would both build on the reputation of Qualispecs and also introduce it to a new group of customers who will buy its products through association with the retail group. The retail group may also have outlets in other parts of the country (or even internationally) which would allow Qualispecs to expand its markets. Diversification There appears no need at present to diversify. The disadvantages of operating in new markets with new products (e.g. lack of experience and reputation) outweigh any possible advantages.
Social responsibilities Answer 1 (a) (i) Twenty years ago, the idea that profitability was overwhelmingly the principal objective of a business would have been uncontroversial. Today’s climate is different: increased public awareness of the social impact of large organisations has broadened the range of objectives which businesses must aim to achieve. New factors to be considered include pollution control, conservation of natural resources and avoidance of environmental damage. In the shortterm, the measures described in the question would reduce costs; all of them involve increased costs or revenue forgone. And reduced costs imply reduced shareholders’ wealth in the form of dividends and capital growth.
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chapter 16 However, this analysis, though relatively straightforward in the short term, may not be so clearcut in the longterm. Many commentators argue that the reputation and image of corporations will suffer if they do not respond to heightened awareness of social responsibility amongst consumers. Given that many companies are already taking steps along this path, and making good public relations out of their efforts, there is pressure on other companies to follow suit. Failure to do so may lead to longterm decline. (ii) A conflict between company objectives implies a picture of managers pulling in opposite directions, some trying to meet criteria of social responsibility, others hellbent on maximising profit. Given that all of the managers in a company are drawing on the same pool of resources this is a recipe for disaster. However, that does not mean that companies are doomed to fail if they pursue more than one objective. The ideal is to agree on a balance between conflicting objectives, and to settle on a strategy which satisfies both sets of objectives, to the extent that they can be reconciled. (b) Part of the difficulty in pursing aspirations towards social responsibility lies in the relative novelty of the concept. Managers brought up in a culture of profit maximisation may find it hard to appreciate the importance of other objectives, and to adapt their behaviour accordingly. To ‘operationalise’ social responsibility involves making managers aware of the need for it and creating the infrastructure to promote the appropriate culture. This may be achieved by: –
appropriate training;
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dissemination of targets and measures related to social objectives;
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formal incorporation of social objectives into the decision making process;
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collaboration with other organisations to launch a common approach;
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appointment of external consultants to assess existing performance in this area and to recommend improvements;
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monitoring achievement by logging and publishing of performance indicators;
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appointment of committee to review and implement social and ethical policies.
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Questions & Answers (c) An organisation’s stakeholders include: –
owners/shareholders;
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employees;
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business contacts, such as customers and suppliers;
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the general public;
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the government.
Owners/shareholders will be interested primarily in profitability, but the analysis in part (a) above suggests that longterm profitability may depend at least in part on the adoption of social objectives. Employees obviously have a very direct interest in at least some social objectives; for example, the question mentions a policy of paying wages above national minimum levels. Business contacts have a less direct interest in this issue. However, as a minimum, creditors will be impressed with an ethical policy of paying debts on time, and customers who themselves have social and ethical interests may exert pressure on their suppliers to conform as well. The general public, as already mentioned, have shown themselves increasingly aware of these issues, and prepared to back their principles with direct action (such as refusing to invest in companies whose objectives they disapprove of). The government must meet international obligations as well as satisfying the demand of their own electorate. Both factors mean that they will take an interest in the social and ethical policies of organisations.
Digwell Explorations Answer 2 (a) Ethics Ethics are a code of moral principles that people follow with respect to what is right or wrong. General examples might include staying within the law, not engaging in bribery or theft or endangering other people. Also a part of ethics is social responsibility; the duty towards the wider community or society in general which includes environmental issues, public safety, employment and exploitation of third world workers.
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chapter 16 In this case ethical issues which the government should have considered when granting permission for mining include: (1) Employment in the local area The government has a duty toward people to provide them with jobs. In Eastborough there is significant unemployment so it is particularly important to the government to generate jobs in the area. The effect of the mining on employment levels should therefore be considered. (2) The local economy The government has an obligation to the people of Eastborough to improve the wealth of the people there. This largely depends on a successful economy. The local economy of Eastborough has been performing badly despite various initiatives based around tourism. The effect of mining on the local economy generally must be considered (i.e. jobs create income which is then spent in local shops, demand for property increases and prices rise for all in the area). (3) Environmental concerns Eastborough has a beautiful coastline with rare birds nesting there. The government has a debt towards society generally to preserve areas of natural beauty for all to appreciate and enjoy, and a moral obligation towards other species on the planet to protect them from extinction. The effects of the mining operations on the rare birds, the beauty of the coastline and any pollution caused in the locality should therefore have been considered by the government. (4) Rights of local individuals Individuals have the right for their quality of life to remain high. While employment and an improved economy may improve the quality of life of many, there may also be negative effects for some local people such as increased noise and traffic congestion. These broader effects on villagers is likely to have been considered. (5) Right to free operation of business Many capitalist countries believe in free trade and removing barriers to trade. This may be seen as a right of the business, and it may be considered as part of the decision to allow Digwell to open the mining operation.
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Questions & Answers Conflicts between stakeholder groups Stakeholders are people who are affected or interested in some way by the mining operations. In this case stakeholders include: –
national government
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local government
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local people
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wildlife protection groups
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environmental groups
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directors of Digwell
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employees of Digwell
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shareholders of Digwell.
The conflicts which may exist include the following: (1) National v local government Local government will be interested in Eastborough and its interests. National government have to balance those needs with the needs of all people of the country. There may be a conflict over the amount of funding available to support local initiatives such as to help start up the mining operations. (2) Unemployed v people based near mining operations/working people Unemployed people of the area will notice a direct benefit from the mining operations through increased jobs and are likely to support it. Other local residents may simply view the operations as disrupting their existing life (noise/congestion) and oppose the idea. (3) Shareholders/directors of Digwell v environmental/wildlife protection groups Both shareholders and directors of Digwell wish to make profits from Digwell’s operations. The mining operations will enable them to make full use of an asset they own (tin reserves) and hence increase profit. They will wish it to go ahead, and may have very little interest in the broader impact. Environmental groups aim to protect the environment and are likely to oppose any part of the mining operation which will affect the environment irrespective of profitability.
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chapter 16 (b) Stakeholder mapping A useful model that can be used to examine stakeholders and how an organisation should deal with them is Mendelow’s Matrix. Mendelow said that there are two key aspects of understanding stakeholders: (1) Power This is the degree to which the stakeholder group can exert influence over Digwell, its operations and likely profitability. The local government, for instance, have the power to grant or refuse planning applications and hence have a lot of power in the tin mining issue. A local individual who feels strongly against the mining operations may have little power because whatever they do they are unlikely to be able to influence the decision. A large local group of people, on the other hand, have more power since they may be able to influence the local authority who must ensure the best interests of local people are met. The greater the power a group has the more their views will be considered when decisions are being made. Digwell, for instance, will have ensured that all local government concerns are met in order to get permission to undertake mining. (2) Interest The level of interest which the stakeholder has in the company (or in this case the mining operations) is also important to the company. If a party is not interested then the company will not need to concern itself with communicating with them or adapting to meet their needs. In this case, for instance, central government is likely to have little interest in the local issue even though they have significant power. As long as the issue is not seen to affect national issues they are likely to remain unconcerned. The matrix Stakeholders can be placed into Mendelow’s Matrix according to their interest and power. Depending on where they fall, a different response will be necessary from Digwell.
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Questions & Answers
The responses required are as follows: Key player – keep close Key players must be kept close to the company in all major issues relating to the mining operations. For example, close relationships should be built with the local government so that they are continually kept informed of new plans. This ensures the plans are acceptable and within regulation. Any new requirements are also quickly understood and can be dealt with promptly. Keep happy For example, the central government should be kept happy by ensuring that the issue does not affect their main concern, national issues as a whole. So long as this is the case they are unlikely to get involved in this local issue and exert their considerable power. Keep informed For example, Digwell employees will be very interested in the effect of the new operations on jobs. It may, for instance, create job security for them, or mean they have to relocate. It is therefore very important to ensure they understand the impact on them and expectations of them. Without formal notification, information will spread via rumour which may be inaccurate and cause undue concern.
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chapter 16
Minimal effort It is important to clarify which groups have little power or interest to avoid unnecessary effort being made. An example here is the general public outside Eastborough. They are likely to have little interest or power and so no effort needs to be made to keep them happy and there is little benefit from keeping them informed.
KNK Colour Answer 1 (a) A logical start point for the strategic planning process is the procedure often referred to as a ‘position audit’, which looks at the internal strengths and weaknesses of the organisation. Fitting this analysis to the external environmental factors facing the organisation leads to a process similar to that described in the question. Although the formal position audit procedure may be triggered by an ad hoc event, or by an intuitive feeling among top management that the time is right, a more systematic process is preferable. In some organisations an annual exercise is conducted to ensure that operational performance and strategic structure make a good ‘fit’ with the external environment. The nature of the process is well brought out by the ACCA definition of position audit. The planning process examines the current state of the entity in respect of: –
resources of tangible and intangible assets and finance
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products, brands and markets
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operating systems such as production and distribution
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internal organisation
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current results
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returns to stockholders.
Matching this appraisal to the external environmental factors – such as economic and social conditions, competition and technological developments – can lead to identification of a ‘strategic gap’: the shortfall between targeted performance and the anticipated consequences of a given strategy. Alternative plans of action can then be formulated and evaluated to bridge the gap.
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Questions & Answers (b) Porter was concerned with a firm’s ability to generate a competitive advantage. He classified the possible strategies for doing so into three ‘generic’ categories: –
cost leadership;
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differentiation;
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focus.
An organisation wishing to generate strategies could use this as a framework for producing and evaluating options: –
cost leadership can be pursued through improved efficiency, increased automation, economies of scale, etc.;
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differentiation can be pursued by real modifications to products or services, or by creating a perception of such differences by effective branding and advertising;
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focus can relate to specialisms in customer type, geographical location, product features, quality, etc.
Organisations wishing to develop strategies can use Ansoff’s Matrix, which categorises existing and new markets and products, to focus on different combinations of products and markets: –
Staying with existing products and existing markets, but aiming to increase market penetration (as well as internal efficiency).
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Developing new products to be targeted at the existing markets.
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Opening up new markets for existing products – market development.
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Developing new products and aiming at new markets – potentially the riskiest approach.
(c) Both of these models can be productive sources of generating strategies, and each provides a useful framework for evaluation of alternatives. But each also suffers from limitations. Porter’s model implies that all the buyers in a market have perfect knowledge of all the products available to buy. If this were true, then a firm that benefits from no competitive advantage would attract no buyers and would be doomed. In practice, the knowledge of buyers is limited and firms can prosper despite an absence of competitive advantage. Ansoff’s model depends upon a simplistic division of strategic factors into product factors and market factor. Although this can help managers to focus on the different aspects of a problem, the truth is that these factors are linked. 436
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chapter 16 Both models also imply that a firm will focus on one strategy to the exclusion of others. In reality, a firm can pursue a number of different strategic objectives at the same time.
C Engineering Answer 2 (a) When preparing a corporate appraisal of the organisation, the strengths, weaknesses, opportunities and threats of the organisation should be analysed in such a manner that both internal and external factors are taken into account in the development of C’s strategic plan. Strengths C is a wellestablished company that ‘has a strong track record’. It has successfully survived a major recession, albeit 10 years ago, and this would give its shareholders more confidence. These factors would indicate that the company has an experienced team of managers and also adequate resources which enable it to grow. C has a strong reputation as an organisation that has successfully undertaken major contracts and is recognised as an organisation ‘using good quality materials and applying high standards of workmanship’. It is probable that the success of the organisation has derived from the resources it has developed and retained. Weaknesses C has specialised in one activity only, i.e. the building of roads. The company is engaged as a subcontractor to a major Eastlandian development company. The board of directors of C are aware that another development company in Eastlandia ‘had been allowed to go into receivership without any further government support’. In the event that this happened to the development company that has engaged C on a subcontract basis, C could be faced with major problems. Of vital importance, therefore, is the need for C to monitor the financial position of any such parties with which it has a similar relationship.
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Questions & Answers At present there is a possibility that C will lose significant amounts on the contract to construct a major road in Eastlandia. These losses might be precipitated by either the foreign exchange position, or penalty payments that might be imposed as a result of late completion of the project. C’s reputation within Eastlandia will have been injured by the failure of the supplier to provide high quality materials. Since it is possible that work in Eastlandia might comprise around 40% of C’s order book, the problems in that country might have a significant adverse impact upon C. Opportunities C benefits from the lack of confidence in local civil engineering contractors since C itself has a good reputation within Eastlandia. This is a source of competitive advantage for C as it is has become associated with work of a high quality. This is of particular significance due to the fact that other contractors have been responsible for constructions that have collapsed. Confirmation of the good reputation established by C in Eastlandia lies in the receipt of the invitation to tender. C could use its established reputation in order to diversify into related areas of civil engineering. (b) As a subcontractor to the Eastlandian development company, C faces a number of different threats as a result of its involvement in the roadbuilding project in Eastlandia. The serious economic situation developing in Eastlandia has threatened to result in an economic recession and this may have serious consequences for C. In addition, we know that during the last three years the overseas markets in which C has been carrying out building contracts have suffered a serious economic recession. The Eastlandia government is likely to reduce the level of spending on the infrastructure of the country and this will reduce the number of building contracts available. This could well result in the postponement of civil engineering projects within Eastlandia. Given that Eastlandia might represent 40% of C’s order book, the effect of a recession could prove hugely problematic for C. The problem is further aggravated by the economic circumstances prevailing in C’s overseas markets and this will probably lead to a fall in profitability. Whilst it is obvious that C is very well established as a quality contractor within Eastlandia, is should aim to develop new markets in order to reduce the risks of recession in any one country. It may be difficult for C as a foreign contractor to compete in countries where preference is given to local organisations. C could avoid such potential situations by entering into strategic alliances thereby ensuring a presence in the market place. However, C would need to be mindful of the potential problems inherent in such strategic alliances.
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chapter 16 Currently, C provides subcontract services to an Eastlandian development company. It is quite possible that this company could get into financial difficulty and the spinoff effects of this would be serious for C. It is known that another company has already gone into receivership and so it is essential that the board of directors of C take measures in order to safeguard its position should the development company experience financial difficulties. C should, in future, seek to ensure the financial well being of all organisations with which it becomes associated. The reasons for the delay in progress payments should be ascertained immediately. Perhaps the development company is already experiencing difficulties and, if this proves to be the case, then assistance should be offered in order to prevent any further activities relating to the contract from taking place if the position is thought to be irretrievable. The contract work in Eastlandia represents 10% of the total business of C’s turnover and thus constitutes a significant part of the total business. It is possible that any problems in Eastlandia could cause problems of a worldwide nature for C. This is another reason why C should take measures to ensure that it is not associated with problem companies as this could not only create financial difficulties for C but could also damage the image of C on a worldwide basis. The current estimate is that the contract will be completed three months late which renders it likely that C will be liable for penalties in respect of the contract. C’s management should attempt to ascertain the causes of any delay and put in place an action plan aimed at ensuring the contract completion occurs at the earliest possible date. C should inform other parties involved in the contract of the likelihood of the three months’ delay in completion of the contract. It is quite possible that a fall in the share price of C will occur when the increased possibility of the occurrence of losses on the Eastlandia contract becomes public knowledge. Work of a remedial nature has already been necessitated by the use of substandard materials. Acceptable materials should be procured otherwise additional cost will be incurred and C’s profit will be reduced and its reputation damaged. Any loss of confidence in C by the government could have a significant effect on the level of orders received; this is particularly the case in Eastlandia where the government funds most civil engineering contracts. There exists also the possibility that faulty workmanship could be a cause of accidents and C might be associated with poor quality in the same vein as other companies within Eastlandia. C should institute a system of quality control with regard to raw materials and completed work. This should help to avoid the need to repair the roads soon after completion.
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Questions & Answers The financial performance of companies operating within Eastlandia will also be affected by the relative weakness of the Eastlandian currency. In addition, since C is a sub contractor to an Eastlandian development company, this would cause significant problems in the event that the development company met with severe difficulties. The expected fall in the value of Eastlands will have an impact on C’s profitability. It was envisaged that the rate of exchange would be 7.26 to the £ in the current year whereas in fact it is now standing at 7.74 to the £. This represents a decrease of 6.6% in the current year. The situation worsens if we look one year ahead when it was originally expected that the exchange rate would be 7.54 Eastlands to the £, whereas in fact the forward rate is now being quoted at 8.56 to the £. This represents a decrease of 13.5% next year. The management of C should adopt a hedging technique in order to minimise the effects of the devaluation of the Eastlands currency. Since Eastlandia is facing an economic downturn, C’s management should seek alternative markets which may offer better longterm opportunities. The critical strategic decision facing C’s management is the need to assess to what extent the organisation should commit itself to working within Eastlandia. In order to ensure longterm survival, C’s management might decide to obtain more business in other countries even if profitability is reduced in the shortterm. (c) One of the advantages that accrues to C as a result of forming a strategic alliance with the Eastlandian civil engineering contractor is the fact that it will have knowledge and experience of the prevailing local conditions as well as the benefits of past knowledge and experience. The strategic alliance affords the opportunity for C to obtain benefits more quickly than would otherwise have been the case. It is quite possible that the benefits from the strategic alliance will be obtained at a lower cost than if either party to the alliance had to obtain knowledge and experience without help from the other party. It is vital that C chooses its partner very carefully. High on the list of desirable attributes of a potential partner is the reputation for good quality. The management of the prospective partner should have a thorough understanding of the customs and culture of Eastlandia. The prospective partner should have knowledge of prevailing legislation regarding civil engineering activities. In view of the fact that many contracts will be initiated by agencies of the government, a good relationship with the Eastlandian government would be most useful.
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chapter 16 The acquisition of local knowledge may help C to avoid or at least reduce the risks of default by a civil engineering developer. Since the failure of such a developer could precipitate major financial loss for C, any means of avoiding the occurrence of such losses would be worthwhile. On the other hand, the local company would benefit from the quality of advice and the technology provided by C. In this respect the established reputation of C as a quality contractor would be very beneficial to any local developer. C’s expertise with regard to health and safety issues might also benefit local developers given the current incidence of accidents as a result of poor quality construction within Eastlandia. C’s management must be creative in their search for a strategic partner and attempt to find one with a complementary skillset. The arrangements of the alliance need to be detailed carefully.In particular, C’s management need to consider the financing arrangements, how decisionmaking will be managed within the alliance, and what procedures will be followed in the event of the local company experiencing financial difficulties. All these issues need to be agreed before the strategic alliance is finalised.
Multinational company Answer 1 The company currently operates with two different structures:
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A centralised structure with the European Head Office maintaining responsibility for product design, manufacturing and the product range.
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A decentralised structure based on national divisions within Europe, with each division’s managers being responsible for setting the selling prices of each product and the distribution of products.
This organisation, using joint responsibility, has the following weaknesses:
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Conflict and resentment between head office managers and divisional managers will arise because some decisions are imposed on divisional managers whilst they must make others. It is likely that when things go wrong, managers spend a lot of time blaming each other instead of trying to solve problems.
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Divisional managers are likely to be demotivated by the removal of their authority over the years as the European Head Office has taken over responsibility for decisions they used to have.
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Questions & Answers
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As European business practice becomes more integrated and greater harmonisation between countries occurs, there will be less benefits that can be obtained from having a divisional structure based on different countries. Duplication of work will result, particularly associated with marketing. Further integration within Europe is likely to result in a single European Currency, harmonisation of taxes and pricing within Europe becoming more uniform.
Recommendation The company should restructure and reconfigure itself as a divisional structure based on related product groups. The company is quite large with over 100,000 employees in Europe. The company should be divided into three or four product divisions comprising about 30,000 – 35,000 employees with head office retaining responsibility for administration. Each division should be responsible for product design, production decisions and marketing for the whole of Europe. Each division can be further subdivided into small product groups each having its own management team. The structure will have the following benefits
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Each division can be established as an investment centre with its own performance targets. This will enable head office to monitor each division and, at the same time, will enable divisional management to make their own decisions.
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Head Office will be less involved in all operational decisions allowing decisions to be made by divisional managers who know about their product range.
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Each division will be more involved in all operational decisions allowing decisions to be made by divisional managers, who know about their product range.
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Each division will be large enough to benefit from economies of scale. This will ensure that inefficiencies of having too many small national divisions can be eliminated.
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The managers of each division will be motivated to ensure that their division operates effectively and economically, as the performance of their division can be benchmarked against its competitors.
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It will be easier to divest a division at a later time if required or add a division should an acquisition or merger be made.
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The European Head Office can be reduced in size because some of its current responsibilities will be taken over by the divisions.
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chapter 16 It should be emphasised that this is a strategic structural change and will take time to accomplish. It will need the support of the company’s managers and employees and its success will depend upon the integration of the European business environment. If this does not take place the current structure should be retained with minor improvements.
Nikki Photocopiers Answer 1 (a) Whether service and maintenance should have been prioritised for reengineering. Critical success factors for Nikki should include the following: –
Production cost
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Quality control
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Value for money
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Features
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Reliability
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Servicing and maintenance.
Servicing is just one of a number of key areas that could be a candidate for reengineering. Using Harmon’s strategy/process matrix, servicing would be classified as follows:
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Questions & Answers Processes that lie at the upperright are complex, dynamic and of high strategic importance. These are usually the processes that provide the organisation with its competitive advantage and should be nurtured accordingly. The main arguments for reengineering servicing and maintenance first are as follows: –
It has seen the largest fall in the magazine ratings.
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Nikki have their worst score in the ratings in this respect.
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The new CRM system does not appear to be generating the benefits it should have.
It could be argued, however, that value for money should have been targeted first, with its implications for pricing and production, as falling from being rated 1st to 2nd has major implications for competitive advantage. A fall from 5th to 7th in servicing is unlikely to be the main factor in Nikki Photocopiers’ decline. (b) Impact of the proposed changes on competitive advantage. We are not given enough information in the scenario to classify the firm’s competitive strategy as either differentiation or cost leadership. However, the process change can be explained in terms of its impact on cost and / or quality as follows: Quality improvements –
By avoiding having to explain issues over the phone, there is less chance of the engineer being misinformed about the nature of the customer’s problem. The likelihood of them turning up without relevant components and having to pay more than one visit is thus reduced.
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The system allows for more detailed customer requirements to be sent to the engineer than could be communicated effectively by phone.
Cost savings
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A cut in administration input and the elimination of the role of calltakers could lead to job cuts and costsavings
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Invoices will be able to be prepared instantly rather than at the end of each week. This should result in quicker cash receipts from customers and improved cash flow, thus reducing financing costs, for example.
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chapter 16 (c) IT/IS implications The main IT/IS implications of the proposal are as follows: Software the CRM system –
The proposal involves the CRM system automatically generating work orders and sending details to engineers’ PDAs. Furthermore, details are automatically sent to accounts once the job is done.
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While none of these are technically difficult, it is not known whether the current system has these capabilities. If not, then additional addon applications (either offtheshelf or bespoke) may have to be purchased.
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Even if present, new templates may have to be designed and training given to calltakers and engineers on filling them in correctly.
Hardware – using PDAs –
Presumably new PDAs (and associated software) will have to be bought and training given to engineers on their use.
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An automatic phone system where calls are made between PDAs and the CRM system may also be needed.
(d) Should maintenance be outsourced? Arguments for outsourcing maintenance –
Photocopiers are relatively simple machines, so it is likely that external firms will have the expertise to be able to maintain them.
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External firms may have economies of scale – for example, having more engineers makes it possible to see customers sooner.
Arguments against outsourcing maintenance –
The most suitable processes for outsourcing are repetitive and transactionintensive. Maintenance may have aspects of the former but does not fit the latter criterion.
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Dealing with customer queries is a critical success factor so should be kept inhouse.
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Also there is a high risk of damaging the firm’s reputation and goodwill if problems are not handled properly.
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The process of maintenance may generate useful information for designing new/improved photocopiers.
On balance, the critical nature of service and maintenance means it should be kept inhouse.
Institute of Information Systems Administrators Answer 2 (a) A bespoke solution is one developed specifically for an organisation. In this instance the Institute of Information System Administrators would comprehensively specify their requirements for the OnLine Marking Project (OLMAP). This requirements specification would be used by the internal Information Systems (IS) department or by an external software house to produce a system that exactly matched the requirements. The software would be owned by the Institute, who could make changes to it in the future to reflect changes to the original requirements. A software package is a generalised solution to an application area offered for sale by a software vendor. In this instance a software company has recognised that a number of educational and training organisations would benefit from online marking software. They have constructed their own specification of requirements and developed a software package called Emark which they now market and license throughout the world. Advantages of the software package approach to systems development might include: Quality The software package is a proven product that has undergone systems testing (in development) and user acceptance testing (by the users who have already bought and used the package). Hence the product should be bugfree, as well as fulfilling most of the functional requirements of the application. The implementation should not be affected by the programming errors and misconceptions that are normally associated with bespoke systems development.
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Time The bespoke systems development needs to be tightly specified, designed, programmed and tested. These parts of the lifecycle are very timeconsuming and during this period requirements may change, so complicating the process even further. The software package is a product that already exists. It can be purchased and implemented almost immediately. There is no requirement for design, programming, unit and systems testing. Other perceived advantages include: –
High quality documentation and training available for inspection
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Maintenance and enhancement provided at a fixed price under an agreement
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Try before you buy, because the software is already available
Disadvantages of the software package approach to systems development might include: Failure to completely fit requirements One of the most commonly claimed disadvantages of the software package approach is the inability of the product to fit all of the users’ requirements. This means that either: (1) Users have to make compromises and accept that they will not get all the functionality they require, or (2) Tailored amendments will have to be made to the software product to deliver the required functionality. Whichever way is chosen, it is clear that most software packages do not fulfil all the user requirements defined for a particular application. Furthermore, they often include facilities and functions not required by a particular user, which only serve to confuse when the product is implemented into the organisation. In contrast, the bespoke solution should completely fulfil all the user’s requirements and, if it doesn’t, will be amended until it does.
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Financial stability of the supplier Internal Information Systems (IS) departments do not go out of business. However, external software suppliers are subject to the vagaries of management and the markets. There is a risk that they may go out of business, or experience financial problems that affect the quality of their support and development services. It is possible to reduce these risks (through Escrow agreements) but the disruption likely to accompany the enactment of such an agreement should not be underestimated. Other disadvantages include: –
Inability to generate a competitive edge because the package is also available to competitors
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Ownership is retained by the supplier
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Legal redress is virtually impossible because of the licence agreement
(b) In the context of the OLMAP project, performance testing will mean –
Testing the scanning time of a batch of scripts.
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Testing the response time of the system when a specified number of examiners and markers simultaneously access scripts for marking and moderation.
Testing the scanning time of a batch of scripts. A test can be set up where a certain number of scripts are taken from the IISA Head Office and scanned into the system. The time taken for scanning can be recorded and further tests may be undertaken to confirm this time. This time can then be scaled up to estimate the time for scanning the scripts of 200,000 students. Scanning time should scale linearly with the number of scripts scanned into the system. Testing the response time of the system This test is difficult to simulate. It is likely that a limited test can be arranged with markers and examiners asked to access the system and record the results. However, the use of load testing software would be more effective. This software allows the testers to simulate a large number of ‘virtual’ users and to diagnose any bottlenecks. Any problems can be addressed before the software is released. The point here is that the response time of the system is unlikely to scan linearly with the number of users accessing it.
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chapter 16 (c) In Direct Changeover/Conversion, the new system is implemented completely and the old system is withdrawn. Thus processing of the current system may end on a Friday night and all transactions pass through the new computer system from Monday morning onwards. Where possible, direct changeovers should occur in slack periods and take advantage of natural breaks in the operations of the organisation, such as industrial holidays. Direct Changeover/Conversion is particularly appropriate to the OLMAP application because there is a natural break in processing within the application. It is not a continual process (like order processing, invoicing and payroll) but an application that runs for a limited amount of time every six months. Direct Changeover/Conversion demands very thorough testing, but it is the quickest and cheapest implementation strategy. In parallel running the old and new systems are run simultaneously for an agreed period of time and results from the two systems are compared. Once the user has complete confidence in the system the old system is abandoned and transactions are only passed through the new one. Parallel running places a large administrative overhead on the user department because every transaction has to be done twice – once through the established procedures and then again through the new computer system. Parallel running makes very little sense in the OLMAP application because the proposed and current systems are so different. The proposed application area (marking) is currently not computerised and any attempt at a parallel run would be costly (involving courier and marking costs) and time consuming. It is unlikely that the results would be very valuable (for example, what lessons could be gained from marking a paper script and its screenbased equivalent?) and they could not be achieved in the tight time constraints of the marking process. The OLMAP application will need thorough testing, but there is little to gain from parallel running. If direct changeover/conversion fails, it would be relatively easy to switch back to the current process as all the paper examination scripts will still be available in a warehouse in Singapore.
SDW Answer 1 (a) Establishing the website Before Mr M tries to establish an internet strategy, he should look at his overall business strategy. In doing this he should find answers to a number of questions, such as:
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Is he only going to continue to operate between three domestic cities?
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How far does he want to expand both internally (in the home market as indicated) and beyond (internationally)?
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Does he have the capacity to take on more bookings should they arise?
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Is he aiming at a different market sector? Does he have a business plan?
Checking this strategy is essential because the IT strategy must be seen to support the overall strategy of the company and not drive it. In the case of the SDW Company, this does not appear to be an issue; the owner wishes to develop an ecommerce facility on the internet site. However, care must be taken to ensure that the site does not cause unnecessary disruption to other systems within the company. Having determined his business strategy, he needs to look at his IT strategy. Would an internet site for bookings be part of his overall IT strategy or simply an addon? Piecemeal implementation could affect other areas of his business systems. The SDW Company already has an internet site, so development of any new site must take this into account along with the overall requirements of the business. Expert advice needs to be obtained as to whether or not to amend this site or design a new one. Experts in web design may have to be employed if this expertise is not available inhouse. Additional care will be required in implementing the IT, for example in ensuring that no incompatible systems are introduced. The IT systems being used in the new internet site must be able to connect to the existing call centre systems. Similarly, the initial focus of the site must be on selling seats on the company’s trains; other services may be offered later, but establishing the core business first is essential. Deciding on ecommerce may have an impact on other parts of the business. For example, setting an objective of a given percentage of business through the internet will decrease percentages of business in other areas. Within the SDW Company, there will (hopefully) be a fall in the use of the call centre. This change must be anticipated and planned for. Staff in the call centre must be kept informed concerning the setting up of the internet site, and then assurances given regarding job prospects and training, either within the call centre or other areas of the company. Where reductions in staffing are required, it is better to obtain these naturally rather than by compulsory redundancies.
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chapter 16 Mr M should also attempt to obtain information on competitors’ sites (and more broadly, sites relevant to the travel industry), to assess particularly their design and ease of use. This would be relatively easy to do – he could even visit the sites himself. This would not tell him how successful the sites were, although some companies boast about the use of their sites in published information. Some travel operators even offer discounted fares for booking this way. He should be careful that any claims are verifiable, and not just another way of attracting publicity. It may be possible to commission some survey information to obtain potential customers’ views on booking through a website. Given the need for security and the current lack of inhouse knowledge, setting up an ecommerce system will require specialist assistance, either by recruitment or outsourcing the writing and monitoring of the site. The services to be offered through ecommerce must also be determined. Decisions regarding services will have a direct impact on the writing of the website, as the authors will need to ensure that the required services can be made available. As already noted, the initial focus must be on travel bookings. Additional services and products may be made available after this core business activity has been satisfied. Whichever method of writing the website is chosen, budgets must be set for this activity and agreed at Board level. If necessary, a costbenefit analysis will be required, partly to justify the cost of writing the site and partly to show the potential benefits from using the website rather than a call centre. Implementation issues The charges (if any) for providing services to customers must also be determined. If ecommerce is to be encouraged, then some discount or other benefit can be expected to attract customers to this service. Given that this method of booking results in lower costs than when booking via a call centre, then the SDW Company can pass on these cost savings to its customers. Prior to the ecommerce service being made available, it will have to be advertised. The Board will need to decide where to advertise and how much the advertising budget will be. Possibilities will include mailshots to existing customers, perhaps by email, and advertising on the websites of other organisations. One of the aims of the provision of ecommerce is to try to remain competitive. A review of competitors’ and other online sites is advisable to help determine the content and structure of the SDW Company site. This review may also help to identify other areas where competitors currently have an advantage so that the Board can address this.
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Questions & Answers (b) Features of internet sites focusing on cost reduction The site must, of course, be very easy to use. SDW should specify simple instructions on a site that is easy to understand and quick to load. The omission of detailed graphics and providing an ‘uncluttered’ site will also decrease programming costs. Incentives to book online such as obtaining loyalty benefits, cheaper prices or being able to book earlier (which may not be available on off line bookings) could be offered. Although this may not save costs on the internet, it will provide overall cost savings by decreasing reliance on the call centre, thus limiting the number of staff employed. Removing reliance on other more expensive selling media, such as the call centre, removes not only salary costs but also accommodation, pension, equipment and similar costs. Focusing on one booking medium becomes easier to support as only one cost structure is required. Providing appropriate support to customers within the website which does not involve additional human contact. For example, provision of FAQs, a good help system and advice on each stage of the booking process. Customers are encouraged to resolve their own problems, which limits intervention from expensive staff. Provision of other information on the website to attract customers to it, for example details of company performance or similar information already available within the organisation. Placing the information on the website is relatively inexpensive given that the information is already required inhouse. Setting up webspecific information would be more expensive. Innovative uses of Internet technology, for example suggesting destinations on a limited budget rather than customers specifying where they want to go. Providing these ideas as unique selling points will attract more customers to the website, again limiting reliance on other media.
RUS plc Answer 1 (a) Total Quality Management (TQM) can be defined as ‘the continuous improvement in quality, productivity and effectiveness obtained by establishing management responsibility for processes as well as outputs. In this, every process has an identified process owner and every person in an entity operates within a process and contributes to its improvement’.
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chapter 16 Quality is a term often used to signify ‘excellence’ of a product or service. However, if we are to define quality in a way which is useful to the management of RUS plc, then we must recognise that quality is simply meeting the requirements of the people who use the hotels. This means that the company needs to start its assessment of quality by understanding the true requirements of its various customers. The company’s stated policy is to provide ‘a highquality service for the discerning guest’ and presumably meeting its customers’ requirements has wide implications which include dealing with initial enquiries, availability of accommodation, prices charged for the various services provided, level of customer service, facilities offered, standard of food and overall reliability, amongst many other features. TQM will emphasise the importance of RUS plc’s ‘marketing’ function. It must take the lead in establishing the quality requirements for the services. This will determine service features such as the grade, quantity, facilities, timing, etc. For example, prior to opening a new hotel or refurbishing an existing one, the company’s management will need to consider its location and accessibility, before deciding whether it will be principally a budget, firstclass, business or family hotel. This may, of course, involve the use of market research techniques. TQM, and the way it is organised (which is discussed in (b)), gives people throughout the organisation a common language for improvement. It enables all the people working in the hotels, with different abilities, needs and priorities, to relate readily with one another, in pursuit of the common goal of quality. A hotel is so complex and employs so many different specialist skills that everyone has to depend on the activities of others in achieving their own quality standards. TQM provides the vitally important chain which links the ‘users’ and ‘providers’. TQM involves the continual examination of the requirements and RUS plc’s ability to meet them. After all, the needs of both ‘internal’ and external customers change over time. This alone will lead to a ‘continuing improvement’ philosophy. The benefits of making sure that requirements are met at every link of the chain are very great in terms of improved customer satisfaction, increased competitiveness and market share, improved productivity, elimination of waste and reduced costs. Relevance of a strategy needs to be evaluated in terms of costs and benefits. A TQM programme for RUS plc will be costly. The staff may need to be increased substantially to provide the quality levels required, and training will also have a prominent role. However, the benefits could be enormous.
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Questions & Answers (b) The ability of the company to meet its ‘upgrading’ objective will depend on its staff and organisation. Throughout the group as a whole, and within each separate hotel, there is a series of quality chains which may be broken at any point by one person or one service not meeting the requirements of the customer. The key to TQM is for everyone in the organisation to have welldefined customers – an extension of the word ‘customer’ beyond the customers who use the hotel, to anyone to whom an individual provides a service. Thus the ‘room service’ staff would be the customers of the kitchen staff, who would themselves be the customers of the purchasing staff. These relationships form a chain of customers and suppliers. Areas of responsibility will need to be identified and a manager allocated to each, and then the customer/supplier chain relationships established. True to the principle outlined above, the quality requirements of each ‘customer’ within the chain would be assessed, and meeting these would then become the responsibility of the ‘suppliers’ who form the preceding link in the chain. Quality has to be managed – it will not just happen. To meet the requirements of TQM, RUS plc will probably need to recruit more staff, particularly managers, and may also need to change the level of services on offer to its customers, which includes the ‘internal’ customers. This will involve costs in terms of the redesign of systems, recruitment and training of staff, the purchase of equipment and the refurbishment of existing facilities. These costs need to be estimated and included in costbenefit assessments, and in the strategic plan that is being formulated. (c) The contribution of the management accountant breaks into three distinct aspects: (i) providing information, (ii) analysing and interpreting the information, and (iii) advising managers on the basis of the analysis. This contribution can be related to the needs of RUS plc’s new TQM strategy. (i) Provision of information The vital need of TQM is to first find out what the customer requirements are. The internal supplier/customer relationships are often the most difficult to establish. To achieve quality, data needs to be obtained, sifted and analysed to provide information on: working or ‘chain’ relationships, requirements of the people involved, measurements that will be used for performance assessments, capabilities, availabilities, and reporting lines. The management accountant’s participation in ‘quality circles’ would be very useful.
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chapter 16 Also there must be a corporate understanding of the company’s quality position in the market place. Information regarding the company’s competitive position in terms of locations, services, prices and facilities will be required. Market research techniques using both secondary and primary data collection methods will be appropriate. A formal ‘position audit’ of RUS plc’s existing resources of people, equipment, facilities and services will provide data that will enable the company’s needs to be matched with capabilities. This will particularly help in identifying the major areas of existing quality weaknesses. Performance assessment and the competitive appraisal already referred to will be extremely useful in this regard. The management accountant would also become responsible for designing the information systems required by the new TQM system, at the centre of which will be the budget system. Data will also be required to provide for the cost estimation of investments envisaged by the strategic decision. (ii) Analysis of the information The management accountant will use an arsenal of techniques included in the tasks of cost estimation, capital investment appraisal, costbenefit analysis, management and systems auditing to produce report information for management, which can be used to decide on the extent of the changes required, how these changes should be effected, and the costbenefit aspects. Statistical methods can be applied effectively in an analytical role. (iii) Advice for management Management will reasonably look to the management accountant for advice on the strategy. The management accountant’s attributes of knowledge of the situation, professional competence and flair for imagination and creativity would provide useful inputs into the strategic decision. Also, of course, the management accountant would be heavily involved in the decisions relating to the implementation of the new TQM system.
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Book retailer Answer 1 (a) Williams and Sons (W&S) is operating in a mature market which has little growth potential and suffers from low barriers to entry. The supermarket chains are now exploiting this area by moving into book sales, utilising their large buying power to buy cheaply and sell at low prices. Combined with a policy to only stock high volume sales titles, this gives them attractive profitability. W&S does not have the buying power to compete directly with supermarkets through price reductions. At the same time it is obliged to carry a comprehensive range of stock to meet the requirements of the wide range of customer groups who patronise the specialist bookshops. The current role of information technology (IT) at W&S is very much in the ‘support role’(McFarlan and McKenney – Strategic IT grid) and is not providing the firm with a competitive edge. By support we mean that the current and future competitive potential of IT at W&S is considered low. Technological development can (and does) change the competitive characteristics of market sectors. Change can impact on either competitive forces (e.g. barriers to entry, substitutes, etc.) or on the industry’s value chain or, in some circumstances, on both. In periods of change, opportunities present themselves to those organisations which have the capability to identify and exploit the potential of new technology (which is often not immediately obvious). John Williams has undoubtedly seen that technology has changed the way in which he can market a wide range of specialist books, whilst not being constrained by physical location – the need to have retail outlets which customers visit to buy books. At its most advanced, the concept of ecommerce would allow W&S to establish a website to market and sell specialist books worldwide. Customers would use the internet to visit the W&S web site, browse through book lists, order in realtime and pay through a credit card transaction. W&S could link this online order entry system to warehousing, stock control, product dispatch and sales accounting.
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chapter 16 In terms of the McFarlan and McKenney analysis, John Williams now sees the IT position at W&S as being in turnaround, i.e. the current potential is low but the future strategic potential of new applications is high. The turnaround IT position at W&S is the most challenging from a management viewpoint. Moving from support to turnaround takes place in organisations which are unlikely to have a high level of IT skills needed to effectively exploit the new technology. In addition, operating in a current low technology environment, it is likely to be difficult to convince the management in a changing organisation of the potential importance of the new IT strategy. Furthermore, the culture of the organisation may be one which is antitechnology. This is the challenge facing John Williams in a turnaround situation. He has correctly identified a strategic opportunity but he must now drive forward an IT project in an organisation which has never implemented such a project in the past. Tutorial note: This solution promotes the potential of selling books via the internet. You might want to take a less optimistic view in your solution, given the experiences of eretailers. Whatever view you take, you should answer the question as stated, and use a suitable conceptual framework to support your arguments. (b) In many ways the identification of the ecommerce opportunity is the easy part – its successful implementation will require substantial capability in IT planning and implementation. IT planning implies a structured process of scanning, identifying, assessing and exploiting technological opportunities. It is of critical importance in organisations which operate in market sectors which have strategic IT potential. &S now finds itself operating in such a market. Typically IT planning will cover the following elements and processes.
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Alignment: The IT plan underpins and supports the business strategy – it does not take place in isolation.
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Scoping: This sets the boundaries of the IT plan and seeks to achieve a balance between inhibiting innovation (too narrow) and avoiding drift (too wide). For example, a scope issue at W&S would be whether to integrate a new logistics system with the relevant book publishers.
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Timescale: Both a near and far perspective in relation to identifying manageable ‘chunks’ of project activity.
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Benefits: Assessment of costs and benefits (both tangible and intangible).
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Realistic: The plan must match the capabilities of the organisation in terms of both competencies and resources.
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Milestones: The plan should have performance measures for monitoring progress.
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Flexibility: The capability to respond to changed circumstances during the implementation phase.
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Communication: Once agreed, the plan must be communicated to all the concerned parties to inform them of the new strategy to be followed and their place in it.
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Responsibility: This must be assigned to managers and teams in relation to plan delivery.
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Support: It is essential that senior management expresses and delivers a commitment to the IT plan.
Multinational and local authority Answer 1 (a) The objectives of any organisation should relate to its mission. A mission statement is frequently formally stated, but this is not always the case. Sometimes this mission statement is informal i.e. it is not set out in unequivocal terms but is widely known and understood. The organisation’s mission encapsulates the ‘raison d’être’ of the organisation and should focus on the demands of the principal stakeholders. Following from this, the objectives of the organisation can then be stated within the framework of the rational planning model. Within the MNC the main stakeholder group would be the shareholders, whereas within the local administrative authority the main stakeholder group would probably be the local community. It might well be that central government prescribes objectives for the local administrative authority, permitting some degree of freedom. In order to determine exactly what the strategic targets should be, those responsible for the local administrative authority must make a detailed assessment of the needs of the local community. Thus there exists the need to liaise with a number of other organisations with a local presence. Whatever strategic targets are set they will be set with the overriding need to satisfy the objective that economic, efficient and effective services are provided by the local administrative authority. The targets should be set in a manner that enables performance measures to be made as to the extent to which the three Es have been attained.
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chapter 16 It is quite conceivable that the needs of the local population will vary between different areas within the overall boundaries of the authority. Statistical information should be used in order to assess the actual level of service provision against the perceived level of need; for example, in assessing whether the provision of local housing in a particular location met the demand for such accommodation. This will assist in the setting of future objectives. Perhaps it may be necessary for housing to be established as the primary objective because there is a significant underprovision of locally administered housing. If this were to be the case then it is probable that other services would be affected. By way of contrast, an MNC is likely to find its objectives much easier to establish. The shareholders are the major stakeholder group in the business. The primary objective of an MNC will be to maximise its longterm wealth and increase the value attached to its shareholding. It is probable that the MNC has secondary objectives relating to issues such as social responsibility, ethical trading practices and the quality of goods and services. These are usually set with the attainment of the primary objective, i.e. creation of long term wealth for its shareholders in mind. (b) The measurement of performance levels achieved by an organisation must relate to the nature of the objective that has been agreed. Objectives should be capable of being measured, and thus one that is nonspecific in nature is likely to prove problematic as regards its measurement. Consequently, the extent of its attainment is difficult to quantify with any degree of exactitude. It is probable that the local administrative authority will establish targets, thereby enabling measurement of the extent to which objectives have been achieved. Carefully chosen performance indicators will be monitored. For example, with reference to locally administered housing, then appropriate performance indicators would be the number of residents waiting for accommodation and the average waiting time to be housed. In the event that a reduction were to occur in the number of residents awaiting housing due to the increased provision by the authority, this would indicate that the objective of effective service provision was being achieved with regard to housing in the area.
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Questions & Answers It is also possible for performance measurement to be made utilising the ‘balanced scorecard’ approach. This would be applied in respect of the financial perspective, internal business processes, learning and growth and customer perspective. In order to determine how economically the local administrative authority is providing its services, it should not only compare its results with those of previous years, but also make detailed comparisons with the results of other authorities. The authority may review its business processes for the provision of various services and state how it has made changes to these processes as a consequence of learning from experience. The conduct of customer surveys will enable the measurement of the satisfaction of local residents to be measured. As part of the objective setting process, it is appropriate for the representatives of the authority to determine how objectives will be measured. The appropriateness of performance measures will need to be reviewed in order to take into account the changing nature of the service provision in respect of the dynamic business environment. The local administrative authority should give consideration to inviting members from within the local community to contribute to the measurement of its performance. For instance the local press, charity groups and other local interest groups would invariably seek a role in measuring the performance levels achieved by the authority. It would be much more positive for them to work in conjunction with the authority towards the attainment of agreed objectives as opposed to adoption of a more combative posture. The MNC will probably have significantly lower levels of stakeholder participation in the measurement of its primary objective. Objectives defined in terms of profitability will be set within a given timeframe. The MNC will report on the levels of its earnings and the impact upon shareholder value. The financial markets will primarily determine the extent to which the MNC is successful in achieving its objectives. In contrast, the view of the local community will be the principal determinant as to whether the objectives of the local administrative authority have been attained. Local vested interests will inevitably be visible within a local community, whereas the shareholders of the MNC will not have interests of such a nature. The shareholders will comprise a group with disparate interests. The MNC will therefore be subject to market pressures. The market will view the worldwide activities of the MNC, and the prevailing share price of the MNC will reflect the attitude of the market to those activities.
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chapter 16 The ‘balanced scorecard’ approach could be used by the MNC in order to measure its overall performance. The principal aim of this approach is the quantification of how much shareholder value has been added. In essence, the market determines this value.
Jays Answer 1 (a) There are a number of Human Resource Management (HRM) issues that will be impacted upon by the move from retailer to services. Recruitment On a fundamental level, when Jays were retailing shoes they operated 123 outlets; the move into repairs meant trebling the number of outlets to over 300. This expansion will have meant a significant increase in the number of employees within the outlets. As well as this, the skills required between retailing and repair are different and so different types of employee would have been hired. In addition, the number of outlets may require an increase in the management positions at head office analysing the data produced. Finally, Jays is expecting that more difficult repairs will be carried out at a national centre. Specialist employees to carry out this work will need to be recruited. Training There are some overlaps between the retailing and repairs businesses. Retailing is very much geared towards customer service, an area that Jays has identified as important within the repairs business. There will obviously be some training involved for the watch repairers. However, it has already been identified that this can be broken down into ten easy operations. This should make the training progress quicker. Delegation It appears that Jays is already a decentralised organisation since much of the decisionmaking is already carried out at each individual outlet. Jays will need to ensure that there is consistency between outlets particularly over which repairs are passed back to the national centre.
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Questions & Answers Culture The culture within the outlets at Jays may cause the management problems. As the company concentrated less on shoe retailing and more on shoe repair, the culture of the craftsman may have appeared. Under this, knowledge, skill and experience would be respected and passed on to more junior members of staff (almost like apprentices). The watch repair side, as noted above, has been made extremely simple with the result that the status of the ‘expert’ repairer may be diminished. (b) Motivating the workforce at Jays may prove more difficult than it initially appears. A number of methods that might normally work in companies might prove difficult to implement in Jays’ situation. For example, the work at Jays might prove to be monotonous and so job rotation might be undertaken. The difficulty with this is that this would mean training all the staff in the skills of shoe repair which might prove costly. Similarly, due to the geographical area being covered, moving staff between branches may not be practical. Another common motivation technique would be to undertake job enrichment, whereby members of staff add on new skills to their current ones. Again, in the context of Jays’ large number of small (ten employees or fewer) autonomous shops there is a limit to how far this can be developed. One suggestion would be to reward staff on the outcomes of their performance. For example, measuring customer feedback (although how useful this might prove is debatable). A broader reward based on the financial performance of the shop might be introduced. The difficulty with this is that the nature of the business is reactive, if nobody’s shoes need repairing there is nothing the branch can do about it. The likelihood is that some kind of competencebased system will be introduced. Under this, the employee would be graded by the branch manager on how well they fulfil certain competencies. These might include technical competencies such as their knowledge and the quality of their repairs and to service competencies such as how well they deal with customers.
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chapter 16
Y Answer 1 (a) Resistance to change in organisations can be considered according to whether the resistance comes from individuals, groups or the organisations themselves. Individual level At the individual level, the following reasons/causes have been noted as factors involved in resistance: fear of the unknown, well formed habits, threats to economic interest/status and the threat of inconvenience. In the case of Y, there is much for employees to fear. Several will be afraid that, in the longer term, they may lose their jobs. Some will fear that they may have to move from one job to another or from one department to another. For some, this will be quite an upheaval, although others may welcome the change. Some will fear that the change may bring a loss of status in the organisation, especially those in middle management whose jobs are to go. Redeployment to another job may include a protected salary, but delayering will inevitably result in a loss of status for some employees. Then there are the problems with learning new skills. Some employees will fear that they might not make the grade and be reluctant to take on retraining. Group level At group level there will be collections of individuals who see their position threatened and who will combine to resist any threats to their position. The middle management groups in Y in particular will feel threatened and will be looking to their trade union to protect their interests. There may well be calls for industrial action to attempt to prevent delayering from taking place, or at least to win for the managers affected the highest possible severance pay or redeployment terms. Even where individuals are not members of a trade union, it is possible for groups of employees, including managers, to collude informally to resist change. This may be achieved by such measures as withholding information or by not being wholly cooperative with those seeking to implement change.
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Questions & Answers
Organisational level At the level of the organisation, a number of factors will operate to make the change process difficult. These included the existing structure and culture of the organisation, the existing investment in resources, and past contracts and agreements with various stakeholders within the organisation. For example, many state industries that have been privatised in recent years have required flatter, more organic, organisational structures; it is hard to change from a ‘role’ culture to a ‘task’ culture to cope with competition in the open market and hard to renegotiate the terms of the contracts with stakeholders, such as the trade unions. (b) A useful way of looking at the problem of resistance to change is via the simple framework formulated by American social psychologist, Lewin. Lewin’s framework suggests that change, or lack of it, is the result of disequilibrium or equilibrium between two sets of opposing forces. One set he refers to as ‘driving’ forces, because they act to encourage and facilitate change, and the other as ‘restraining forces’ because they act in the opposite direction and seek to maintain the status quo. Any attempt to bring about change, therefore, requires ways and means of overcoming resistance to change. This may be achieved in a variety of ways, but it is apparent that what is required is either a further strengthening of the forces for change or a reduction in the power of restraining forces. Using this framework we can see that the major driving force for change is the increasing competition brought about by changes in the industry environment. There is little that Y can do about this except to respond to it by becoming leaner and more effective. The reduction in management levels should help to cut costs, and the strengthening of the telephone banking division should help the bank’s competitiveness, as should the investment in IT and training.
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chapter 16 The spur to change is the threat of the new competition, and management should seek to communicate the message to managers and other employees more effectively. We cannot tell from the scenario just what attempts have been made to communicate to the workforce either the seriousness of the bank’s situation, or the rationale behind senior management’s plans to combat this situation. To the extent that the need for the planned action has not been properly communicated it follows that this must be an early priority for the senior management team. Communication, along with other means such as education, participation, consultation, manipulation and coercion are part of typology of methods advocated by theorists such as Kotter and Schlesinger for assisting in the management of change process. It may be that communication is not sufficient and that a process of education is required. In this day and age the senior managers should tread carefully. Bank employees generally have a high level of education and it would not help the case for change if management underestimated this. Nevertheless, in trying to persuade employees that the plans management have drawn up are in the best interests of all, there may be a place for the education of some staff members to management’s point of view. A method associated with communication and education is that of facilitation and support. Y management may be able to alleviate fears of some individuals by the use of counselling and group discussion. Another way of reducing resistance to change is that of involving all employees from the start of the change process. By putting the problem the bank is facing to employees in a series of facetoface meetings, and offering the possibility of participation in the decision making and planning process, it may be possible to get more employees to buy into the planned changes. The problem in the case of Y is that senior management may already have made decisions without consultation. This kind of participation exercise is also timeconsuming. Given that the decisions have been made and that resistance has already been encountered it may well be that the best way forward now is through a process of negotiation with representatives of the workforce. In the case of Y it is probable that trade union officials will represent the employees’ side. Through a process of negotiation and bargaining it may be that the union can gain sufficient concessions from management, in terms of builtin safeguards and appropriate compensation for its members. The bank could then be allowed to proceed without further hindrance.
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Questions & Answers An alternative approach is the less ethically based use of manipulation and cooptation. Manipulation involves seeking to persuade people by the use of partial and misleading information while cooptation involves ‘buying people off’ by the promise of some kind of reward for going along with the proposed changes. Through these methods are used, they are not the kinds of methods that professional people would involve themselves with. If all else fails, however; senior management may find that the use of explicit and implicit coercion is the only way forward. This may involve mass redundancies without right of appeal. This method would be one of last resort since the image of the bank would suffer and the morale of the remaining workforce would be badly affected.
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